The Reserve Bank and Philip Lowe’s continuing struggle to acknowledge the reality of profit-driven inflation is looking even more absurd after a new report from the Bank of International Settlements (BIS) (commonly dubbed “the central banks’ central bank”) which not merely explains that firms have been using the cover of inflation to push up profits, but connects it directly to the lack of wages growth over the past decade.
In a section that, curiously, The Australian Financial Review chose to ignore, the BIS’ annual economic report notes:
There are signs that price-setting behaviour is changing. Firms are adjusting prices more frequently than when inflation was low and stable. In addition, corporate profits, which were already on the rise before the inflation surge, have held up remarkably well so far. This is a departure from the historical pattern: in past episodes, profit growth tended to fluctuate within a comparatively narrow range around zero. One concern is that, having been able to raise prices more easily than in the low-inflation regime, firms are now more reluctant to accept profit squeezes and will pass on cost pressures to prices more readily.
The BIS helpfully provides data on the extent to which real wages growth has fallen into negative territory while corporate profits growth has remained strong over the course of the past two years. There’s a risk of a wage-prices spiral, it warns, but “the feedback between wages and prices has been quite low in the last two decades, below 10%”.
But it’s what the BIS says next that makes the report particularly interesting — and probably explains why the AFR didn’t want to cover it.
A stylised exercise based on a decomposition of changes in the GDP deflator during disinflations shows that some catch-up in wages would be compatible with inflation returning to target, but only as long as firms accept a reduction in profits. Back-of-the-envelope calculations suggest that, for inflation to go back to a target of 2%, profits on average would need to decline by about 2.5% per year in 2023-24, should real wages rise fast enough to make up for the loss in purchasing power and return to the pre-inflation surge level by end-2025. For comparison, the cross-country pre-pandemic median for profit growth has been slightly more than 1.5% between 2014 and 2019.”
So after an extended period of profit growth while workers have gone backwards, workers by 2025 could get back to where they were in 2020 in terms of real income if firms’ profits reduced by around 18 months’ worth of growth, based on the last decade.
As Crikey noted recently, merely maintaining current profit levels — let along increasing them as so many companies across so many sectors have done — cements the massive shift from wages to profits that has marked the last decade in Western economies.
Workers could regain some of their lost purchasing power without any danger of higher inflation if corporations lost just a little of the profit growth they’ve enjoyed for so long.
But in the kind of uncompetitive, highly concentrated markets that characterise the Australian economy, that will never happen without government intervention to stop companies continuing to gouge consumers.
I guarantee that the banks will continue to maintain their profits despite the increase in the cash rate. The burden and sacrifice is not borne by all.
The interest rate rise is what is giving cover to the banks to pass on the cost (with a little extra sugar) to borrowers and not to savers….
Productivity and wages are a chicken and egg thing I understand, in that when wages improve then so does productivity. Business expects productivity to improve first, but that is not the way it works as people need an incentive to think and produce more effectively. Also I assume profits must improve as wage earners have more money to spend.
The RBA is talking out of it’s hat given it actively supports policy that suppresses wage growth in the name of taming inflation (NAIRU). Workers will never catchup until the RBA and government get back to achieving full employment.
Not just about full employment when increasing proportion of our permanent population is exiting the working age cohort and joining the oldies in retirement, dependent upon budgets for pensions, health care and other services.
With the working age cohort in decline i.e. passed the demographic sweet spot over a decade ago, kept up by modest permanent immigration and significant temporary churnover, employees should be able to push for better awards and conditions, with union support, with increasing labour demand?
They really aren’t trying to hide the fact now. It’s just straight out war on workers.
It would take politicians much braver than the current Laberal duopoly to act to prevent the profit gouging going on. Besides, they’ve got the RBA scapegoat for when the brown and pungent hits the fan, so business as usual… nothing to see here, so move along.
Lowe and the RBA should publicise the 35% power price increase on 1/7/23. The ACCC and AEMO need to also ask a few questions about Origin, AGL and Alinta blatant price gouging.