RBA governor blames labour growth – not price gouging – for inflation

After a brief flirtation with acknowledging that businesses lifting prices above inflation is adding to inflationary pressure — purely accidentally of course, nothing to do with profits — Reserve Bank of Australia (RBA) governor Philip Lowe has retreated back into full-scale denialism about the central role of profit-gouging in inflation.

In a speech yesterday that drew extensive coverage for Lowe’s announced changes to the RBA board meeting schedule, he also touched on the bank’s thinking about inflation and the likelihood of further rate rises. What is worrying them? “There are ongoing pricing pressures from several factors, including: the high level of capacity utilisation; strong growth in unit labour costs (mainly because of weak productivity growth); a big pick-up in rents; and higher prices for electricity.”

No mention of profit-gouging, which has driven more than half of Australia’s inflation since late 2021, according to the OECD.

During the Q&A following his speech, Lowe was quizzed directly about the role of profits. His response: “The aggregate data show that the profits share excluding the resources sector, which is appropriate to treat them differently, the share has not risen in Australia. What we have seen is firms are able to increase their prices in line with the higher input costs. Being able to pass on input costs fully and preserve the profit margins, but the profit margins have not blown out.”

Remember those profit margins are built on a decade of wage stagnation. Their mere preservation further disadvantages workers who are now suffering large real wage falls.

And according to the minutes from the RBA’s June board meeting, “members observed that some firms were indexing their prices, either implicitly or directly, to past inflation”. That is, not in line with current higher input costs, as Lowe claims, but past levels of inflation.

So which is it, Phil? Are the board members wrong, or are you?

As for what we might call “The Lowe Manoeuvre” — insisting you need to exclude profit-gouging by energy companies in any examination of profit-gouging — as Crikey noted recently, there’s a long list of sectors in addition to energy where there’s evidence of blatant profit-gouging.

Perhaps that’s what Lowe meant when he admitted that well, yes, there had been some profit margin increases, but “by and large, they are confined to specific areas of the economy”.

Specific areas like groceries, energy, construction materials, sea freight, air travel and department stores. Just a few fringe areas that don’t affect consumers much.

By and large.

The end of this joker’s term as governor can’t come soon enough.

This article was first published by Crikey.