Corporate profits

Corporate profits, not wages, fuel domestic inflation

The Australia Institute (TAI) has published a new report arguing that wages made “no contribution” to inflation in fiscal years 2019-20 and 2020-21, and only a 0.6% contribution in the current fiscal year.

Instead, TAI says a study of the national accounts finds it’s corporate profits that drive up inflation, with chief economist Dr Richard Denniss saying it’s the corporate sector that must “tighten the belt”.

Below is the summary along with key graphics:

Key points:

  • Wages made no contribution to Australian inflation in 2019-20 or 2020-21, as measured using the ABS’s broadest inflation indicator, the GDP deflator.
  • Wages accounted for just 0.6 percentage points of the 4.1% price increase so far in the year.
  • The research published today applies European Central Bank methods for analyzing the causes of inflation to ABS data.

Labor costs have played an insignificant role in the recent rise in inflation, accounting for just 15% of price increases across the economy, while profits have played an overwhelming role, accounting for about 60% of recent inflation…

“Australia is not in a wage-price spiral, it is at the start of a price-profit spiral,” said the Australia Institute’s chief economist, Dr Richard Denniss.

“The national accounts show that rising profits, not rising costs, are driving inflation in Australia. While workers are being asked to make sacrifices in the name of controlling inflation, the data clearly shows that it is the business sector that has to tighten its belt.

“While companies claim they have ‘no choice’ but to raise prices, the fact that they are making record and rising profits is proof of how many choices they really have.

“It is a shortage of competition, not a shortage of skilled labour, that is driving up the cost of living in Australia.

“Wages made no contribution to Australian inflation in 2019-20, or 2020-21, and accounted for just 0.6 percentage points of the all-important 4.1% price increase in that fiscal year. “…

“The European Central Bank recently analyzed European price and wage data and concluded that ‘profits have recently been a key driver of total domestic inflation’.”

The ECB report continues:

“To put it more provocatively, many, but not all, eurozone companies have benefited from the recent surge in inflation. Corporate and household fortunes have also diverged outside the eurozone, with corporate profits in many advanced economies surging in recent quarters.

TAI is on site. Australia’s Real Unit Labor Cost (ULC), which according to the Australian Bureau of Statistics “are an indicator of the average cost of labor per unit of output produced in the economy” and “are a measure of the costs associated with the employment of labor, adjusted for labor productivity”collapsed 6.3% underneath their pre-pandemic level in the March quarter of 2022:

Real unit labor costs

Australia’s actual ULC has been declining for 35 years.

Consequently, Australian wages have actually been disinflationary, as real wage growth has been negative while productivity has increased.

In turn, Australian businesses recorded record profits as a share of the economy, while Australian workers’ share of the national economic pie hit historic lows:

Share of total factor income

Businesses make money while Australian workers fall back.

Anyone who cares about inflation should attack corporations for driving up prices (inflation), instead of attacking workers whose real wages (and share of national income) have fallen. They should also require gas reservations on the East Coast and coal/gas export controls and super profit taxes to decouple Australian energy prices from the world market to reduce inflation.

Stop falsely blaming Australian workers for inflation as corporations ruthlessly defraud consumers and make obscene profits.

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