By Shane Wright
Corporate profits contributed far more to Australia’s rise in inflation through the past year than from wages and other employee costs, according to international research that challenges the official view of the Reserve Bank and federal Treasury.
Compiled by the Organisation for Economic Cooperation and Development, and released on Wednesday, the research shows that as inflation accelerated in Australia early last year it was profits pushing up prices.
But through the second half of 2022, as inflation peaked at 7.8 per cent, both profits and labour costs added as much as each other to the rise in prices.
There is a growing global debate about whether some companies, or some industry sectors, have used the war in Ukraine and easing of COVID-19 restrictions to drive up profits and add to the world’s inflation pressures.
This week, the president of the European Central Bank, Christine Lagarde conceded to a parliamentary committee that there appeared to be cases of increased corporate profits making the European Union’s inflation problems worse.
She called for better data on corporate profits and closer scrutiny by European competition agencies.
Domestically, the left-leaning Australia Institute has argued for several months that much of Australia’s inflation surge over the past year has been driven by higher-than-usual profits, especially in the resources sector.
Those profits have in turn pushed up costs for the rest of the economy.
The OECD, which examined 15 nations including Australia, found in recent years there had been more frequent simultaneous contributions to inflation from both profits and business labour costs.
It found that a larger part of higher profits were contributing to inflation from the mining and utilities sectors of economies.
Gas prices have soared since Russia’s invasion of Ukraine, driving up profits for oil and gas companies and feeding into inflation.Credit: Getty
In Australia’s case, almost all the inflation recorded in the March quarter of 2022 – the largest three-month rise in inflation in more than three decades – was attributable to company profits. Labour costs, such as wages, did not add to inflation.
By the end of the year, however, the December quarter inflation result was almost split between profits and labour as commodity prices eased and wages growth started to lift.
“A significant part of the unit profits contribution has stemmed from profits in the energy and agriculture sectors, well above their share of the overall economy, but there have also been increases in profit contributions in manufacturing and services,” it found.
All major oil and gas companies have reported large profits over the past year. Chevron more than doubled its profit to $US36.5 billion last year, Shell doubled its profit to $US40 billion while Exxon increased its profit to $US56 billion.
The OECD said one issue may be a lack of competition that is enabling businesses to pass on costs with relative impunity.
“A key policy issue is whether the observed aggregate increase in unit profits reflects a generalised lack of competitive pressures throughout the economy, or specific factors that have contributed to strong profit growth in a few sectors or in a subset of firms,” it said.
Last month, research by the Reserve Bank suggested little connection between high profits and high inflation.
It found in the resources sector, the high prices of commodities such as iron ore and base metals had delivered better profits to companies but not had an effect on inflation.
The profit margins of most businesses are being squeezed, according to Australian Chamber of Commerce and Industry chief executive Andrew McKellar.Credit: Alex Ellinghausen
While energy products had benefited from high global prices, which then lifted wholesale and retail gas prices, the bank argued this was a reflection of international issues.
“While higher energy prices have simultaneously boosted energy producers’ profit margins and consumer price inflation, the primary underlying cause is global energy market conditions rather than higher markups in the energy sector independently driving prices,” it said in its May statement on monetary policy.
Outside of resources, the bank found the overall profit share of businesses in the economy was only slightly higher than it was in 2019.
Australian Chamber of Commerce and Industry chief executive Andrew McKellar said the rise in corporate profits had been overwhelmingly driven by record commodity prices.
“High inflation and rising interest rates have heavily impacted the cost of doing business, with profit margins shrinking in many industries over the past two years,” he said.
“Price increases by businesses have been consistent with the fact that firms are only able to partially pass through cost increases in their final prices, reflecting competitive pressures and price stickiness.”
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