Inflation fuelled by ‘profits’, not wages’, research finds

Inflation would have stayed within or near the RBA target band if companies had not squeezed consumers, research finds.

Surging profit results by major companies have coincided with workers enduring unprecedented real wage cuts as the 7.8 inflation rate significantly outpaces 3.3 per cent wage growth.

Inflation would have stayed within or near the Reserve Bank target band if companies had not squeezed consumers through excessive price increases, according to new research that finds corporate profits, not wages, is the main driver of inflation.

Research by the Australia Institute’s Centre for Future Work has found the annual average rate of inflation since the pandemic would have been as low as 2.7 per cent without the inclusion of excess profits in final prices for locally made goods and services.

Surging profit results by major companies have coincided with workers enduring unprecedented real wage cuts as the 7.8 inflation rate significantly outpaces 3.3 per cent wage growth.

The institute’s finding is based on businesses, as of the September quarter, increasing prices by $160bn per year over and above their higher expenses for labour, taxes and other inputs, and over and above profits generated by growth in real economic output.

A second scenario that allowed for modest nominal inflation in unit profit margins found inflation would have averaged 3.3 per cent, slightly above the RBA target band.

“A profit-price spiral is the main driver of inflation in Australia, rather than a supposed ‘wage-price’ spiral, which does not exist,” the research says.

It says “excess” corporate profits account for 69 per cent of additional inflation beyond the RBA’s target, while rising unit labour costs account for just 18 per cent of that inflation.

The centre’s director, Jim Stanford, said the “empirical evidence shows excess corporate profits are the main culprit driving inflation, not workers’ wages”.

“For Australians doing it tough, this data would be aggravating.

“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.”

Australian Manufacturing Workers Union national secretary Steve Murphy said average annual wage rises in union-negotiated enterprise agreements made in the past three months were 4.18 per cent, compared to 3.33 per cent in the previous 12 months.

“We all see the record profits and CEO pay rises,” Mr Murphy told The Australian.

“Between the stagnation in real wages, spiralling inflation, rising energy bills and interest rates going up, workers are struggling.

“The AMWU and our members have been fighting for, and delivering, better wages for our members.

“Union members earn more. It pays to be a member.”

Dr Stanford said without excessive price hikes through the pandemic, “inflation would likely be within the RBA target band, and hence there would be no need for the nine extreme, back-to-back interest rate rises that are crushing households and mortgage holders, fuelling the cost-of-living crisis”.

“The pain experienced by workers through current inflation contrasts sharply with unprecedented increases in business profitability at the same time.

“Through this episode of post-Covid inflation, real wages have declined rapidly, labour’s share of GDP has declined and corporate profits have set records. That is completely opposite from the experience of the 1970s, when real wages rose, labour’s share of GDP increased and corporate profit margins fell.

“History confirms that fears of a 1970s-style ‘wage-price spiral’ are simply not justified or grounded. Instead, inflation in Australia since the pandemic clearly reflects a profit-price dynamic.”