Profits, not wages, are the main driving force behind inflation, according to a new report today that throws light on major companies like Harvey Norman posting big profits while passing on higher prices to customers.
Independent think-tank The Australia Institute found that 60% of recent inflation was the result of corporate profits, which was some four times the impact of wage growth (15%) on rising prices.
The report pointed out that wage growth was at record-low levels, while the profit share was at a near-record share of GDP.
The findings are in sharp contrast to statements from the Australian Chamber of Commerce and Industry and the Australian Industry Group (AIG) that wage growth would make inflation worse.
“We are now at risk of a wages and inflation and interest rates death spiral,” AIG CEO Innes Willox said.
“In the current circumstances, there is a clear risk that a high increase in wages without improved workplace productivity would fuel inflation and increase the likelihood of a steeper rise in interest rates to the detriment of growth and job creation.”
The report found wages made no contribution to inflation in Australia during the 2019-20 or 2020-21 financial years, and accounted for 0.6% of the 4.1% climb so far this financial year.
Researchers used the European Central Bank method to analyse the GDP deflator (a different measure to the consumer price index) to draw its conclusions.
As of the March quarter, inflation is at a 20-year high of 5.1% with rates expected to climb as high as 7% by the end of the year before declining towards 2-3% next year, according to Reserve Bank of Australia governor Philip Lowe.
In announcing the interest rates has increased 50 points to 1.35% earlier this month, Lowe stressed that COVID-19’s disruption to supply chains, the conflict between Russia and Ukraine and strong demand was boosting inflation the world over.
“Global factors account for much of the increase in inflation in Australia, but domestic factors are also playing a role,” Lowe said in a statement.
“Strong demand, a tight labour market and capacity constraints in some sectors are contributing to the upward pressure on prices.
“The floods are also affecting some prices.”
Executive chairman of Harvey Norman Gerry Harvey told radio station 3AW that retailers were left with “no choice” but to raise prices on some consumer goods.
“If a guy down the road drops the price, we drop the price,” Harvey said.
“If we drop the price, they drop the price.
“But if it’s costing you all 10% more than it was yesterday, they’re all going to put up their prices [because] they’ve got no choice.”
But the report says Harvey’s own comments show big corporate giants like his are more flexible than they are willing to admit on price.
“Increasing prices in line with, or in excess of, rising costs margin is a choice to maintain or increase profits in Australia even though the profit share of GDP is at a near record high,” the report found.
Harvey Norman came under intense scrutiny during the pandemic for receiving $22 million under the taxpayer-funded JobKeeper scheme (though the company repaid $6.02 million of it) while also posting a bumper profit for 2021, up 80%.
Australia Institute chief economist Richard Denniss says despite such concerns from employers and business groups, the data showed that increasing profits were the major factor for inflation.
“Australia isn’t experiencing a wage-price spiral, it’s at the beginning of a price-profit spiral,” said Denniss.
“While workers are being asked to make sacrifices in the name of controlling inflation, the data makes clear that it is the corporate sector that needs to tighten its belt.
“It’s a shortage of competition, not a shortage of skilled labour that is driving up the cost of living in Australia.”
Appearing on Sky News at the weekend, Treasurer Jim Chalmers stressed that wages “are not the reason why we’ve got this inflation”.
“And so I don’t share a number of the concerns which have been raised about some kind of destructive wage spiral,” he said.
“We’ve still got real wages falling quite substantially. We want to see those wages growing in a sustainable way.
“And that means by making the economy more productive, so that there are lots of win-wins for employers and employees and we get living standards up.”
Emma Elsworthy is Climate Editor at Crikey, SmartCompany, and The Mandarin, and writes daily morning newsletter the Worm. Before joining Crikey in 2021, Emma was a breaking news reporter in ABC’s Sydney newsroom, a journalist at BBC Australia, and a journalist in Fairfax Media’s regional network. She was part of a team awarded a Walkley for coverage of the 2019-2020 Black Summer bushfire crisis, and won the Australian Press Council prize in 2013.
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