Increasing profits going to corporate Australia have accounted for more than two-thirds of the nation’s inflation problem, according to new research from The Australia Institute.
Dr Jim Stanford, director of The Australia Institute’s Centre for Future Work, said his research provided further evidence corporate Australia was profiting more than suffering from rampant inflation.
“Corporate spokespersons in Australia claim their businesses are mere intermediaries in the inflation experienced since the COVID pandemic: merely passing along to consumers the higher costs they have had to pay for their own purchased inputs,” he argued.
“The unprecedented expansion in booked corporate profits during this period confirms that this claim is false. In addition to higher costs for inputs, companies have increased prices much further.”
Dr Stanford’s analysis of ABS National Accounts data from the December quarter of 2019 (pre-COVID) to the most recent September quarter of 2022 found that 69 per cent of inflation above the mid-point of the Reserve Bank’s 2-3 per cent target range was attributable to rising corporate gross profits.
That compared to 18 per cent related to the compensation of labour (wages and super), and just under 14 per cent for small business gross income.
“Australian businesses had increased prices by a total of $160 billion per year over and above their higher expenses for labour, taxes, and other inputs, and over and above new profits generated by growth in real economic output,” Dr Stanford wrote in the report.
“Measured per unit of real output, corporate profits were 30 per cent higher as of the September 2022 quarter than before the pandemic started, less than three years earlier.
“Small business profits per unit of output were 22 per cent higher. Unit labour costs were less than 10 per cent higher. Unit costs of other factors (including government enterprise profits and dwelling-owner surplus) were just 3 per cent higher.”
Business groups have responded to similar previous analyses by pointing out that much of the increase in profit share has been concentrated in the resources sector.
“The labour share has not declined, other than for the mining and finance sectors,” Peter Burn, head of policy for business lobby the AiGroup, told ABC News last year.
“All other sectors aggregated, there is no decline in the labour share of income.”
Dr Stanford acknowledged that much of the surge in profits accrued to the mining and energy sectors, which posted record profits, reinforced by a spike in global oil and gas prices following the invasion of Ukraine, however he argued the design of JobKeeper had also strongly boosted business profits across the board.
“This analysis of factor incomes confirms that the business sector, particularly corporations, has been the major net beneficiary of the disruptions and policy responses resulting from the COVID pandemic,” he wrote.
“Corporate profits have been especially vibrant since the acceleration of more generalised inflation since early 2021. The partial decline of global energy prices later in 2022 moderated those profits somewhat.”
‘Business able to pass on costs’
The Australia Institute is not alone in pointing the finger for rising inflation at corporations over workers.
Researchers at the Federal Reserve Bank of Kansas City in the US recently estimated that more than half the inflation seen there in 2021 was due to rising profit margins.
“Mark-ups grew by 3.4 per cent over the year, whereas inflation, as measured by the price index for Personal Consumption Expenditures (PCE), was 5.8 per cent, suggesting that mark-ups could account for more than half of 2021 inflation,” they wrote.
However, they also noted that mark-ups fell back in 2022 and were not heavily correlated with sectors where high demand was high.
“We conclude that an increase in mark-ups likely provides a signal that price setters expect persistent increases in their future costs of production.”
Back in Australia, responding to the 3.3 per cent annual increase in the December quarter wage price index released earlier this week, Betashares chief economist David Bassanese pointed to the record 4.5 per cent slump in real wages experienced by workers.
“To be sure, the marked acceleration in consumer prices over the past year can’t be blamed on run-away wage growth. Households have faced a drastic cut in real wages,” he noted.
“Instead, the lift in inflation has reflected a range of non-wage cost factors and the relative ease with which business has been able to pass on these costs without overly crimping their profit margins.
“This reflects strong underlying consumer demand but also areas of the economy where competition is arguably not as strong as it should be.”
The Reserve Bank recently published estimates that between half to three-quarters of inflation was related to supply-side issues, rather than excessive consumer demand that might be generated by increased earnings.
The bank has also very deliberately shifted terminology from talking about the risks of a wage-price spiral to the risks of a price-wage spiral, where corporate price rises push workers to seek higher wages to meet the rising cost of living.
Dr Stanford sees that as a long overdue shift in attitude, recognising that the current inflationary episode is very different to the long period of stagflation (economic stagnation plus high inflation) experienced in the 1970s.
“Real weekly earnings have declined since 2019 at an average annual rate of over 3 per cent – meaning that an average of 3 per cent of the real purchasing power of Australian workers’ incomes has been eroded by inflation every year since the pandemic hit,” he noted.
“During the 1970s, wages grew faster than inflation, generating average real wage growth of 2.5 per cent per year (over and above inflation) through the decade.
“That pace of real wage growth exceeded labour productivity growth at that time (which increased at an average annual rate of 1.4 per cent through that decade), producing a 2.4 percentage point increase in the share of GDP going to labour compensation over the decade – and a corresponding decline in the share of GDP going to corporate profits.
“In contrast, through the current inflationary episode, workers lost an equivalent share of GDP (2.4 percentage points) in just three years, while the corporate profit share swelled by an even larger amount.”
Excess profits driving interest rates higher
Dr Stanford argued that inflation would have been much closer to the Reserve Bank’s target band of 2-3 per cent if it was not for the surge in income going towards the corporate sector.
“Without excess profits, the course of price inflation since the pandemic would have been considerably moderated – even with the supply disruptions and other shocks which have affected price levels in this period,” he wrote.
“Excluding all excess profit growth since December 2019 (above and beyond economic growth and the costs of other productive inputs), GDP inflation would have averaged just 2.7 per cent per year through to September 2019. That is barely half the 5.2 per cent average annual rate of inflation actually experienced since end-2019”
“Even if we accepted that nominal profit margins (on a unit basis) should be allowed to increase in line with an accepted target rate of inflation since end-2019, annual GDP inflation would then have averaged only 3.3 per cent in the period since December 2019. That is well below actual realised inflation, and only slightly above the RBA’s target band.”
Dr Stanford said the inevitable consequence of rising profit margins pushing up inflation is higher interest rates than would have otherwise been necessary.
“It blames the victims of inflation, while ignoring its perpetrators, and will impose further needless harm in coming months through further real wage reductions, and quite likely an economic recession,” he concluded.
However, this week’s weaker than expected wages data have some economists thinking that a pause in rate hikes might come sooner rather than later.
“Wage indicators, including advertised jobs on Seek and newly approved Enterprise Bargaining Agreements are running around 3.5 per cent year-on-year,” noted AMP’s Diana Mousina.
“The RBA’s hawkishness will be challenged by [this week’s] wages data and we expect that the RBA is closer to a pause in its tightening cycle than the market is predicting.
“We see one more rate rise in March, taking the cash rate to a restrictive level of 3.6 per cent.
“But, increases in the cash rate after that time will be hard to justify if the data continues to show a slowing in the jobs market, weakening retail spending and a decline in forward-looking inflation indicators.”
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