Corporate profits, “not wages”, are the biggest contributor to high inflation in Australia, new analysis has found, suggesting that inflation could have been kept within the Reserve Bank’s target band had businesses not indulged in “excess price hikes” through the pandemic.
Research from the Australia Institute’s Centre for Future Work found that businesses hiked prices by $160 billion as of the September quarter of last year, “over and above” the rises in operating costs they faced through global inflationary pressures.
The report, based on Australian Bureau of Statistics National Income Accounts data for the September quarter of 2022, suggests that if consumers weren’t left to pay for profits priced in by businesses at the checkout, inflation since the pandemic would have tracked markedly slower.
The Canberra think tank says that without those profits, inflation would have come in at an annual average of 2.7%, just over half of the 5.2% recorded since late 2019 and well within the RBA’s 2% to 3% target band.
Priced in corporate profits footed by consumers accounted for 69% of additional inflation beyond the RBA’s target, the analysis found. By comparison, labour costs made up 18%.
Economist and director of the Centre for Future Work Dr Jim Stanford said the findings would be “aggravating” for Australians doing it tough.
“We’ve been told a story that workers need to restrict wage growth and accept a permanent reduction in living standards in order to fix inflation. This evidence shows that’s an economic fairytale,” he said.
Stanford said without the “excess price hikes” through the pandemic, there would be no need for the nine “extreme” consecutive interest rate hikes that have put unsustainable pressure on households and mortgage holders since May last year and exacerbated the cost of living crisis.
The report’s findings come just two days after Coles beat forecasts by posting a net profit increase of 11% in its half-year results, before Woolworths reported a 14% rise in profits off the back of a period of high food price inflation.
Australia’s big four banks stand to fare well, too, after the Commonwealth Bank of Australia mapped out what is set to be a lucrative reporting season for lenders. Australia’s biggest bank posted a record cash profit of $5.1 billion in its half-yearly results last week, thanks to back-to-back interest rate rises.
Wages data released by the ABS on Wednesday, meanwhile, showed the wage price index increased by 0.8% through the last three months of 2022, taking the rate of annual wages growth to 3.3%, below the RBA’s 3.5% forecast.
With inflation at 7.8%, the gap between wages and prices has widened to a gulf of 4.5%, resulting in a sharp fall in Australians’ real wages unseen since records began in 1998.
The figures prompted renewed criticism of the central bank, where concerns over a wage-price spiral — in which wages increases drive price increases which in turn lead to further wage increases — were central to its monetary policy outlook earlier this month, forecasting pay increases to run past 4% this year.
Economists agreed the data showed no evidence of a wage-price spiral. Treasurer Jim Chalmers said wages growth “isn’t the problem” driving inflation, but is instead part of a solution to easing cost-of-living pressures.
Australia Institute senior economist Matt Grudnoff said it’s clear profits were playing a central role in driving inflation in Australia, and that to blame workers was “gaslighting of the highest order”.
He said Australia is an “economy of oligopolies”, where a few large firms dominate the market, unchallenged on excessive pricing.
“Twenty years ago, there were lots of different local hardware stores. Now, there’s just Bunnings and Mitre 10. And that’s just happening in industries all over Australia,” Grudnoff told Crikey.
“And the result of that is there is less competition, and that allows firms to increase prices as we’re seeing right now. The RBA should take an interest in competition, particularly banking, which has been terrible for decades. But the ACCC and the government should take a fresh look as well.”
Grudnoff isn’t alone in issuing warnings on the inflationary threats posed to the Australian economy by major firms yielding market power. In July last year, former ACCC chair Rod Sims issued early advice on the need for sector-specific action to help curb inflation.
When there is high inflation, dominant firms often realise they can increase prices above any cost rises because consumers will be more accepting of this. They will often do this subtly over time,” he wrote.
“We need to understand the sectors that may be contributing most to inflation and consider sectoral responses rather than rate rises.”
In 1963 as everyone knows Milton Friedman brought some tablets of stone down the mountain. “Inflation is always and everywhere a monetary phenomenon,” they said.
“Friedman” is not a portmanteau of “Bankman-Fried” but may as well be. Inflation is caused when the supplier of a good or service can and does get a higher price for an otherwise unchanged good or service. Back in the 70s we were told that striking workers were the cause of inflation, exactly in accordance with that definition. That was fixed by workers in largely Asian countries volunteering to do essentially the same work for a lot less. Most of the time since, things like “alternative supply” have kept a lid on corporates’ ability to charge what they like, with a random handful of unfathomably greedy outliers like Apple, Porsche and Burberry.
Supply shocks this decade mean that even the most incompetently-run men’s shed (“Qantas”) can charge new Porsche prices while selling old Datsuns. However much we admire the chutzpah (some do), it’s still inflation.
But all this is still trivial compared to asset inflation. Very little of the decades-long ballooning in the price of the “Australian Dream” is due to labour price increases or recent material supply shocks. But its consequences are far more serious than the stuff Philip Lowe wrings his little hands over.
Exactly. Well put. One thing Australia has way too little of is market competition. We run a cosy business protection racket economy called, my oligopolies. Usually duopolies. And not so much “my”, given the number of multi-nationals. The only market competition business wants is workers bidding for work at the gate.
The lack of competition reflects and reinforces the lack of investment opportunity, so we get asset inflation when cheap money is added to “stimulate the economy”. Surprise, surprise, given the few investment choices and the tax concession settings, a truckload goes into housing, cue housing crisis.
One wouldn’t give Friedman such sole credence, nor Ayn Rand et al. who masked the real economic muse (of now Koch ‘Atlas’ Network) James ‘segregation economics’ Buchanan demanding low taxes, low regulation and small or no government is a pathway, along with anti-immigration, population & border control policies, to eugenics for the 1%.
See The Atlantic: ‘The Architect of the Radical Right. How the Nobel Prize–winning economist James M. Buchanan shaped today’s anti-government politics‘ By Sam Tanenhaus July/August 2017; draws on the research of academic historian Nancy MacLean in ‘Democracy in Chains: The Deep History of the Radical Right’s Stealth Plan for America’.
The simple solution to the asset price / housing affordability crises is simple and radical – pass legislation that a person can only own 1 residential property and a company or partnership cannot own residential property – the problem is solved
And most nights on TV the newsreader will earnestly tell us of how businesses are really struggling to manage, it’s easy if your mates own the information outlets.
On Macquarie radio’s 2GB yesterday arvo the reaction to this clear, concise and damning report was to rant about how hard it is to find staff because wages are too high – no cog/dis at all.
This raving was bolstered by the obligatory ‘fake tradies’ calling in to bemoan how they’ve gone out of business due to taxes & costs – one ‘trucker’ claimed to have half a dozen trucks but couldn’t make a go of it because drivers wanted too much money…
Yay for free enterprise!
Colour me shocked!
Yep. And I bet these unfortunate truck drivers are made to work unsafe hours, get paid little and drive trucks of questionable maintenance standards.
All because HawKeating caved in to the ‘stalwart indie truckers’™ ® ‘\_(°~°)_/` to defeat the “spy-in-the-cab” which would have stopped them being ground into dust by outrageous demands to flaunt safe driving regulations.
“PLEEEEZ, exploit us some more!” they cried “until we become blood smeared remnants on the roadside verge as a result of too many ‘little white pills'”.
Hawke’s Svengali, Abeles was happy to oblige.
F—ing brilliant. Like the little white pills and blood smeared remnants on the roadside verge. I am still working. Can you ring Ray Hadley and those other See You Next Tuesdays on 2GB and 2UE and tell the that. Otherwise I will when I retire.
BTW it was Neville Wran, Premier of NSW, who initially caved in to the independent truckies in 1979 when they blockaded Sydney, chiefly at Razorback Mountain, outside of Picton on the old Hume Hwy to demand a list of things. One of them which they got was the abolition of road tax. This weakened the competitive advantage of rail and it was all downhill from there.
road tax was a voluntarily tax that you could go to jail over if you did not pay it, some did fight it and won .
The news that:
“Corporate profits, not wages”, are the biggest contributor to high inflation in Australia, new analysis has found …..”
is about as revelatory as saying, “the sun will rise in the east tomorrow morning (cloud cover or not)”.
I am becoming increasingly tired of people complaining about the profiteering behavior of (especially large) corporations in our economy. For instance, recently on television, someone was bemoaning the fact that companies put “profits before people“!! Well, for god’s sake, what do those people expect? They seem to be quite content to live in a capitalist society and vote for political parties that take donations from these corporations and then they complain because the (in many cases, essential) services that these private companies provide cost them so much. Don’t they understand the basics of capitalism? The very raison d’être of any corporation, large or small, is not to provide the best service to the community, it is rather to make as much profit as possible. You do not need an economics degree to be able to comprehend the fact that we are all being gouged by big business. (Although if you do have a BEc you will probably have learned all the spin and lies that are so commonly used to justify the status quo by those who benefit from this legalized scam.)
I notice also that when the public does get a bit restless about being ‘taken for a ride’, then they are told “to take a walk down the street” and seek a better deal; or perhaps that it is all the fault of Vladimir Putin and his invasion of Ukraine. However, those profit figures tell a different story.
Even though I am now fully retired I have much better things to do with my life than “walk up and down the street” looking for “the best deal from a bank” or some other establishment (often those ‘competitive deals’ that you come across might last 3 months or so before some more onerous deal is imposed upon you once they think that they have obtained your business. Of course, this does not only apply to banks, it applies to house and car (or any other type of) insurance, health care coverage, electricity, and gas bills. I am sure that readers will be able to mention many more examples.
The complaints that we are dealing with here have been around as long as capitalism. I am sure that my father would have been making similar complaints 100 years ago. Nothing changes. If we want real and meaningful change, perhaps we need to look at a different system.
I have 2 pieces of advice. First -examine the evidence available before coming to an opinion. There is a difference between an open, contestable market economy vs a capitalist economy where there is undue concentration of market power. Second -understand what cognitive bias is.
Rate rises themselves are unnecessary, rather than giving the money to banks the equivalent could be added to taxes and simply returned to the employee when inflation is restored to something manageable.
This is an important article thanks.
Yes, I believe that the true purpose of a progressive tax system is that it is a natural dampener on inflation, as wages went up in response to inflation, proportionally more money was withdrawn from the economy. If the economy slowed too much, the tax bands could be moved up, giving more money to everybody but with the bottom end getting a higher increase as a percentage of their individual take home (eg if everybody gets $10 a week those on $300 a week are going to notice it much more than those on $3,000 a week). All this could be done without having to smash the blunt instrument of interest rates around.
Back at the start of federal income taxing, there used to be many tax bands (possibly a dozen or more) with a top rate of 60% tax guaranteeing a progressive taxation system. This has suffered over many decades of “simplification”. It’s not that surprising that the conservatives favour a “simple” taxation rate.