Corporate profits

Rising corporate profits are the main driver of soaring inflation: report

Gerry Harvey, President of Harvey Norman. Origin: Supplied.

Profits, not wages, are the main driver of inflation, according to a new report released today which highlights the fact that big companies like Harvey Norman are posting big profits while passing on higher prices to customers.

Independent think tank The Australia Institute found that 60% of recent inflation was driven by corporate profits, roughly four times the impact of wage growth (15%) on price inflation.

The report pointed out that wage growth was at record highs, while the profit share was at a near-record share of GDP.

The findings contrast sharply with statements by the Australian Chamber of Commerce and Industry and the Australian Industry Group (AIG) that wage growth would worsen inflation.

“We now risk a death spiral in wages, inflation and interest rates,” said AIG CEO Innes Willox.

“Under the current circumstances, there is a clear risk that a sharp increase in wages without improving labor productivity will fuel inflation and increase the likelihood of a higher rise in interest rates to the detriment of growth and job creation.”

The report found wages did not contribute to inflation in Australia in the 2019-20 or 2020-21 financial years and accounted for 0.6% of the 4.1% rise so far this financial year.

The researchers used the European Central Bank’s method of analyzing the GDP deflator (a different measure from the consumer price index) to reach their conclusions.

In the March quarter, inflation is at a 20-year high of 5.1% with rates expected to climb to 7% by the end of the year before declining towards 2-3% l next year, according to the governor of the Reserve Bank of Australia. Phillip Lowe.

Announcing that interest rates had risen 50 points to 1.35% earlier this month, Lowe pointed to the disruption of supply chains by COVID-19, the conflict between Russia and the Ukraine and strong demand were driving inflation around the world.

“Global factors explain much of the rise in inflation in Australia, but domestic factors also play a role,” Lowe said in a statement. statement.

“Strong demand, a tight labor market and capacity constraints in some sectors are contributing to upward pressure on prices.

“The floods are also affecting some prices.”

Harvey Norman executive chairman Gerry Harvey told the radio station 3AW that retailers had “no choice” but to raise the prices of certain consumer goods.

“If a guy down the road lowers the price, we lower the price,” Harvey said.

“If we lower the price, they lower the price.

“But if it costs you all 10% more than yesterday, they will all increase their prices [because] they do not have the choice.

But the report says Harvey’s own comments show that big business giants like his are more flexible than they care to admit when it comes to pricing.

“Rising prices in line with or beyond rising cost margins is a choice to maintain or increase profits in Australia, even if the share of profits in GDP is at near record highs,” indicates the report.

Harvey Norman has come under scrutiny during the pandemic for receiving $22 million through the taxpayer-funded JobKeeper program (although the company repaid $6.02 million of it) while posting exceptional profit for 2021, up 80%.

According to the Australia Institute’s chief economist, Richard Denniss, despite these concerns from employers and business groups, the data showed that rising profits were the main driver of inflation.

“Australia is not in a wage-price spiral, it is at the start of a price-profit spiral,” Denniss said.

“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.

“It’s a shortage of competition, not a shortage of skilled labor that is driving up the cost of living in Australia.”

Appearing on Sky News over the weekend, Treasurer Jim Chalmers stressed that wages “are not the reason we have this inflation”.

“And so I don’t share a number of the concerns that have been raised about some sort of destructive wage spiral,” he said.

“We still have real wages down quite substantially. We want to see these salaries increase in a sustainable way.

“And that means making the economy more productive, so that there are a lot of win-wins for employers and employees and we improve living standards.”