‘An economic fairytale’: Australia’s inflation being driven by company profits and not wages, analysis finds

Company profits, not wages, have driven the soaring inflation in Australia, an analysis from the Australia Institute has found.

The thinktank has released evidence of what it calls a "profit price spiral", arguing big business earnings account for 69% of the inflation that is above the reserve bank's target range of 2-3%.

The Reserve Bank of Australia and its governor, Philip Lowe, have been warning of a "wage-price spiral", when price rises cause wages to increase which in turn causes further price rises, which was an issue of the 1970s stagflation period.

However Jim Stanford, from the Australia Institute's Centre for Future Work, has examined post-pandemic price rises and company profits and compared them to wage increases.

Australia is in the midst of a supply side inflation shock, with price increases being driven by breaks in supply chains because of the pandemic and natural disasters, as well as energy supply disruption due to Russia's invasion of Ukraine. But companies have posted profits over and above those increases.

At a parliamentary hearing on Friday, Lowe admitted the central bank's models that guide its responses were "not well suited for supply shocks".

Increases in labour costs account for just 18% of the inflation above what the RBA wants to see before it eases interest rate increases. The most recent GDP data shows Australian businesses increased prices by a total of $160bn a year above taxes, labour and other costs.

Stanford says the evidence shows the additional billions of dollars in company profits have led the soaring inflation Australia is experiencing.

And that without those profit gains, inflation since the pandemic would have risen much more slowly, at just 2.7%.

Stanford says the research shows company profits, not workers' wages, are the culprit for Australia's inflation issues and that the RBA and government should be focusing on those rather than targeting workers through rising interest rates and low wage growth.

"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," he said.

"This evidence shows that's an economic fairytale.

"ABS data shows that without excess 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 most recent wage data, released this week, showed workers experienced the biggest reduction in real wages since records began - with wages growing over the year by just 3.3% while inflation sits at 7.8%.

Lowe and the RBA board have warned more interest rate rises will be coming, as it seeks to bring inflation back down.

Some of Australia's major companies have recently reported record-breaking profits, with Woolworths posting a 25% increase, Coles recording a 11% rise and the Commonwealth bank reporting a 9% lift ($5.1bn profit) for the six months to December.

Qantas on Thursday delivered a record $1.43bn half-year profit.