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  • Profit-Price Spiral: The Truth Behind Australia’s Inflation

    Workers in Australia have suffered considerable economic losses as a result of accelerating inflation since the onset of the COVID pandemic. Reaching a year-over-year rate of 7.8% by end-2022, inflation has rapidly eroded the real purchasing power of workers’ incomes; average wages are currently growing at less than half the pace of prices. Now, severe monetary tightening by the Reserve Bank of Australia (through higher interest rates) is imposing additional pain on millions of workers. Tens of billions of dollars of household disposable income are being diverted away from consumer spending, into extra interest payments made to banks and other lenders. Most ominously, signs of macroeconomic slowdown from higher interest rates portend job losses and even greater income losses in the month ahead.

    The pain experienced by workers through this inflationary episode contrasts sharply with an unprecedented upsurge in business profitability at the same time. Additional profits resulted from businesses increasing prices for the goods and services they sell, above and beyond incremental expenses for their own purchases of inputs and supplies. This dramatic expansion of business profits (taking gross corporate profits to almost 30% of national GDP, the highest in history) has been mostly unremarked on by the RBA and other macroeconomic policy-makers. They have focused instead on the supposed risk of a ‘wage-price’ spiral. However, new empirical evidence confirms the dominant role of business profits in driving higher prices in Australia – not wages. This suggests the focus of monetary policy on wage restraint is misplaced and unfair.

    Major findings:

    • As of the September quarter of 2022 (most recent data available), 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.
    • Without the inclusion of those excess profits in final prices for Australian-made goods and services, inflation since the pandemic would have been much slower than was experienced in practice: an annual average of 2.7% per year, barely half of the 5.2% annual average actually recorded since end-2019.
    • That pace of inflation would have fallen within the RBA’s target inflation band (equal to its 2.5% target plus-or-minus 0.5%). Even within the RBA’s own policy rule, therefore, current painful interest rate hikes would be unnecessary.
    • A second scenario considered below allows for modest nominal inflation in unit profit margins, consistent with the RBA’s 2.5% target – once again, above and beyond the costs of other inputs (including labour and taxes) and the growth of profits due to expanded real output. Even in this scenario, inflation would have averaged just 3.3% since the pandemic, only slightly above the target band, and current harsh interest rate changes would again have been unnecessary.
    • Analysis of the income flows associated with excess inflation since end-2019 confirm the dominance of corporate profits in the acceleration of inflation since the pandemic. Excess corporate profits account for 69% of additional inflation beyond the RBA’s target. Rising unit labour costs account for just 18% of that inflation.
    • The distributional dimensions of post-COVID inflation (falling real wages, falling labour share of GDP, and record corporate profits) are completely opposite from the experience of the 1970s (when real wages rose, the labour share of GDP increased, and corporate profit margins fell). This historical comparison confirms that fears of a 1970s-style ‘wage price spiral’ are not justified. Instead, inflation in Australia since the pandemic clearly reflects a profit-price dynamic.

    The post Profit-Price Spiral: The Truth Behind Australia’s Inflation appeared first on The Australia Institute's Centre for Future Work.

  • Profit-Price Spiral: Excess Profits Fuelling Inflation & Interest Rates, not Wages

    The dramatic expansion of business profits has gone mostly ignored by the RBA and other macroeconomic policy-makers, who have focused instead on a supposed ‘wage-price’ spiral which does not exist. This suggests the focus of the RBA on wage restraint is misplaced and unfair, and that interest rates would be far lower today if companies had not gouged customers at the checkout.

    The report Profit-Price Spiral: The Truth Behind Australia’s Inflation (attached) comes in the same week supermarket giants Woolworths and Coles posted soaring profits, with banks, gas and petrol companies posting similarly soaring returns.

    Key Findings:

    • A Profit-Price spiral is the main driver of inflation in Australia, rather than a supposed “Wage-Price” spiral, which does not exist
    • As of the September quarter of 2022 (most recent data available), Australian businesses 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 profits generated by growth in real economic output
    • Without the inclusion of those excess profits in final prices for Australian-made goods and services, inflation since the pandemic would have been much slower: an annual average of 2.7% per year, barely half of the 5.2% annual average actually recorded since end-2019.
    • That pace of inflation would have fallen within the RBA’s target inflation band (equal to its 2.5% target, plus-or-minus 0.5%)
    • Excess corporate profits account for 69% of additional inflation beyond the RBA’s target. Rising unit labour costs account for just 18% of that inflation
    • The RBAs 9 back-to-back interest rate rises would have been unlikely without excess profits and prices based on the RBA’s own policy framework
    • Real wages in Australia fell 4.5% in 2022, the largest fall on record

    “This empirical evidence shows excess corporate profits are the main culprit driving inflation, not workers’ wages,” said Dr. Jim Stanford from the Australia Institute’s Centre for Future Work.

    “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.

    “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 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 in reality. Instead, inflation in Australia since the pandemic clearly reflects a profit-price dynamic.”

    The new report ‘Profit-Price Spiral: The Truth Behind Australia’s Inflation’ is attached and comes from the Australia Institute’s Centre for Future Work, by Dr. Jim Stanford.

    Supermarkets, banks and petrol companies have recently posted huge profits:

    The post Profit-Price Spiral: Excess Profits Fuelling Inflation & Interest Rates, not Wages appeared first on The Australia Institute's Centre for Future Work.

  • Superannuation needs an objective and needs to be reviewed

    This week the government announced a review to legislate the objective of superannuation. Surprisingly, there is no official objective of superannuation and this has allowed it to be used for purposes that are decidedly not about ensuring a comfortable retirement.

    The review has sparked criticism from the opposition who are using it to suggest the government is coming after your money. But as policy director, Greg Jericho, writes in his Guardian Australia column, for the very rich, superannuation has become less about retirement and more about dodging tax.

    Because super contributions are taxed at 15% the biggest benefit goes to those who are on the highest marginal income tax rate. As a result, those with the highest incomes contribute much more of their own money to superannuation than do those on lower incomes. Those earning over $150,000 make up 7% of individuals, 27% of total income, but 32% of total personal superannuation contributions. Also because there is no limit on the size of superannuation balances that can access this tax concession it means those with the very largest superannuation balances continue to get the advantage of a tax concession that has long past any sense of assisting a comfortable retirement.

    These tax concessions are now extremely costly – costing the government almost as much as the aged pension – and moreover so slanted are the benefits to the wealthy that the richest 20 per cent cost the government more tax concessions than it would pay them the full aged pension.

    Clearly, the system is not working as it should. It is not about self-funding retirement but funding retirement by avoiding tax.

    The Treasurer has suggested putting a cap on the size of superannuation balances – somewhere around $3m. Such a size would only affect less than 1.5% of all individuals aged 55-69. But clearly needs to be done because those 1.5% hold 14% of all superannuation balances of people in that age.

    Superannuation is important and vital for the retirement of many Australians. But it should not be used just to avoid paying tax – the cost of that lost revenue is denying assistance to those who actually need help once they stop work.

    The post Superannuation needs an objective and needs to be reviewed appeared first on The Australia Institute's Centre for Future Work.

  • Carmichael Centre Announces Appointment of Prof. David Peetz as Laurie Carmichael Distinguished Research Fellow

    The Carmichael Centre at the Australia Institute’s Centre for Future Work is proud to announce the appointment of Prof. David Peetz, one of Australia’s most outstanding labour policy experts, as the new Laurie Carmichael Distinguished Research Fellow.

    Prof. Emeritus Peetz has recently retired from a long career at Griffith University, where he served as Professor of Employment Relations at the Centre for Work, Organisation and Wellbeing.

    He is also a Fellow of the Academy of Social Sciences in Australia, and author of several important books on labour policy, including: Unions in a Contrary World (1998), Brave New Workplace (2006), and The Realities and Futures of Work (2019).

    Prof. Peetz has provided expert opinion in numerous labour policy forums at the state and Commonwealth level, including providing research and expert input to the Fair Work Commission, and heading an independent review of the Queensland workers compensation system.

    “David Peetz has been a powerful and influential voice for a more balanced and fair approach to labour policy and employment relations for many years,” said Jim Stanford, Director of the Centre for Future Work, host of the Carmichael Centre.

    “His appointment as Distinguished Research Fellow will greatly enhance the capacity and influence of the Carmichael Centre, at a pivotal moment in Australia’s economic and political history,” concluded Dr. Jim Stanford.

    Remarks from Professor David Peetz:

    “The choices we make about labour policy now will shape society for decades, maybe permanently. So it’s an outstanding opportunity to be able to contribute to the formation of those choices through the work of the Carmichael Centre,” Professor Peetz concluded.

    Prof. Peetz will serve a three-year term as Distinguished Research Fellow. The Carmichael Centre was established in 2021 to undertake research and education activities related to the legacy of Laurie Carmichael, the long-time Australian union leader who passed away in 2018.

    The post Carmichael Centre Announces Appointment of Prof. David Peetz as Laurie Carmichael Distinguished Research Fellow appeared first on The Australia Institute's Centre for Future Work.

  • With interest rates set to rise another 3 times, no wonder consumers are feeling grim

    Right now Australian consumers have less confidence than they did in April 2020 when the entire world was locked down and the pandemic was raging without any prospect of a vaccine.

    That might suggest that Australians are overly pessimistic, especially given unemployment is at generational lows of 3.5%, but when you look at the statements of the Reserve Bank and its projections for the next 2 years, it is little wonder Australians are worried.

    Last week the RBA not only lifted the cash rate for the 9th straight time, it signalled that there would be a plural number of rises to come. In response, the market now anticipates at least three more rate rises, with a slight chance of 4 more. That would be easily the fastest and largest raising of interest rates since the late 1980s. And Australians are well aware of what occurred after the 1980s rate rises.

    Indeed even the Reserve Bank is anticipating a sharp slowing of the economy. While not suggesting a recession is imminent, in its latest Statement on Monetary Policy the RBA forecast 2 straight years of GDP growth of less than 1.8%. That would equal the record length of less than 2% growth during the 1990s recession. In reality, anytime Australia’s economy has grown by less than 2% for just one year there has been either a recession or near recession conditions such as during the GFC.

    Australians are right to be wary especially as their standard of living has suffered a sharp decline in the past year as incomes fail to keep up with inflation.

    The Reserve Bank of course does need to be concerned about inflation but given the expectations of recessions of slight contractions in the UK, USA and Europe the risk of a recession should be weighed much higher than they currently are.

    The post With interest rates set to rise another 3 times, no wonder consumers are feeling grim appeared first on The Australia Institute's Centre for Future Work.

  • The Reserve Bank is betting that monetary policy is not powerful

    On Tuesday the Reserve Bank lifted the cash rate to 3.35%, making for a total increase of 325 basis points since May last year. That rise is the fastest since the rises prior to the 1990s recession. And yet, as policy director Greg Jericho, notes in his Guardian Australia column, the Reserve Bank still think more is needed.

    The Governor’s statement concluded that “the Board expects that further increases in interest rates will be needed over the months ahead”. The use of the plural “increases” was a change from the language used in December. This is despite the bank and most economists acknowledging that inflation peaked in December and that global inflation is now falling.

    The RBA acknowledges that the full impact of the rate rises has yet to flow through, and how remains wedded to the policy that the economy is running too hot, despite wage growth likely still in the low 3% range. Most households have yet to feel the impact of around a third of the total amount of the rate rises thus far. With more rate rises forecast to come, that suggests a further increase of around $400 a month in mortgage repayments on a $500,000 loan even before any more rate rises occur. That would suggest a 45% increase in mortgage repayments since April.

    This drastic raising in rates will serve to slow an already slowing economy. The December quarter retail trade figures showed that retail turnover volume was down for the fourth straight quarter, and forecasts for GDP growth estimate very weak growth for two years.

    That the Reserve Bank continue to hike rates without pause suggests a lack of faith in its biggest weapon to reduce inflation, and also that it can finesse rate rises and economic growth. There is no need to keep hurting households without relief or pause – especially given so much of the rate rises remain yet to be felt.

    The post The Reserve Bank is betting that monetary policy is not powerful appeared first on The Australia Institute's Centre for Future Work.

  • As interest rate rises bite, the Reserve Bank should not raise rates next week

    Since May last year, the Reserve Bank has increased the cash rate from 0.1% to 3.1%. The latest cost of living data released this week reveals that this has incurred a 61% rise in mortgage repayments for the typical employee household.

    As policy director, Greg Jericho notes in his Guardian Australia column, this increase has had a dramatic effect on people’s ability to spend money elsewhere. The latest retail trade data released on Tuesday showed a dramatic fall in retail spending in December. The 3.9% fall in the nominal amount spent is increased once you consider the inflation. Even if you account for the tendency for monthly figures to be erratic, the last three months of 2022 saw a stalling of retail spending and a decline in real terms.

    Clearly, the rate rises are forcing people to spend less on retail items and other discretionary purchases. This of course is the intended impact. Raising interest rates increases the cost of borrowing and reduces the level of demand in the economy. But the danger is that the Reserve Bank increases interest rates so fast and so greatly that it slows demand by more than is needed.

    Given the impact of the 300 basis points rises has yet to fully flow through as current mortgage holders typically see their interest rates rise only a month or two after each increase by the Reserve Bank we can expect the cost of mortgage repayment to keep rising in the first quarter of this year.

    With the data already showing the pain of rate rises is causing changes in household spending. The Reserve Bank shod not raise the cash rate when it meets next week, but wait to see the full impact flow through to the economy. After a 300 basis points rise in 8 months no one can suggest the Reserve Bank has been too timid. The fast increase now gives them room to wait and observe rather than keep slamming on the brakes.

    The post As interest rate rises bite, the Reserve Bank should not raise rates next week appeared first on The Australia Institute's Centre for Future Work.

  • Inflation looks to have peaked but the RBA set to keep raising rates

    The latest inflation figures showed that in 2022 prices rose faster on average than they have for 32 years. But while this speed might suggest inflation remains out of control, as policy director Greg Jericho notes in his Guardian Australia column, the data suggests that inflation likely has peaked.

    Jericho notes that inflation in the December quarter was driven by abnormal jumps in the prices of holidays. Rather than being a sign of prosperity and an overabunance of demand in the economy, more this is a sign of a return to some sort of normality after the lockdown in previous years due to the pandemic.

    Similarly a jump in the cost of restaurant meals and takeaway food reflects the ongoing strength in that sector as it fully recovers from the pandemic rather than a sign that eocnmic demand is surging.

    The belief that inflation has peaked is also driven by the fact that the prices of goods – especially those driven by international prices – have begun to stabilise. While they continue to grow at paces well above 3%, no longer is the growth rising.

    That inflation may be peaking however does not mean there is no pain for householders. Grocery prices mostly rose faster than overall inflation with milk and bread rising 18% and 13% respectively. The increases in rental prices are also now showing up in the data. Rents in all capital cities are rising sharply, and in Adelaide and Brisbane they grew faster in 2022 than they have since 2009.

    Amid all this pain, and with economists believing the peak has been reached, the Reserve Bank is still expected to raise rates again next month. This greatly risks slowing the economy more than it needs to and will certainly increase the cost of living for many households.

    This latter aspect is most important given the latest inflation figures suggest that real wages have plummeted by more than 4% in 2022. If we assume wage growth in 2022 of 3.25% (slightly above expectations), real wages will now be back at the level they were in June 2009.

    This period of rising inflaiton has been terrible for workers.

    The post Inflation looks to have peaked but the RBA set to keep raising rates appeared first on The Australia Institute's Centre for Future Work.

  • The Reserve Bank needs to wait before raising rates again

    In 8 months the Reserve Bank raised the cash rate from 0.1% to 3.1% in an effort to slow inflation growth which has been increasing around the world. But while many things in the economy remain affected by the pandemic and its ructions, the impact of interest rate rises remains the same.

    As policy director, Greg Jericho notes in his column in Guardian Australia, the latest lending data reveals that home loan numbers have fallen by 25% over the past year. The cost of repaying an average new mortgage in Sydney or $750,000 has increased by more than third and as a result fewer people are taking out loans and house prices are falling.

    This fall in the price of the item most directly affected by interest rates however is not reflected in the official CPI figures. Rather than measure house prices, the CPI measures the cost of “new dwelling purchases by owner-occupiers”. This is actually the cost of building a new home. In the year to September 2022 (the most recent CPI figures) this item accounted for a quarter of the total growth of inflation. And yet while “new dwelling purchases” rose by 21% the price of dwellings across Australia rose by just 1%.

    This means that inflation is not truly reflecting the impact of interest rates. Rising interest rates do slow the economy, they do reduce the level of money available to mortgage holders to spend on other item and thus reduce demand. That the official CPI figures are not fully showing this does not mean the Reserve Bank needs to keep raising rates.

    The Reserve Bank has already raised rates at a historically fast pace. They have slammed on the brakes as hard as they have at any time in the past 30 years. Given economists around the world are predicting a slowdown in the global economy and here in Australia, the RBA needs to pause its rate rises and not keep hitting the brakes on an already slowing economy.

    The post The Reserve Bank needs to wait before raising rates again appeared first on The Australia Institute's Centre for Future Work.

  • A new tool reveals how badly the Stage 3 cuts mismanage the budget

    Just before Christmas last month the Parliamentary Budget Office released a “Build Your Own Budget” tool that reveals the interactions of taxes, spending and economic conditions that go into determining the budget balance.

    While the tool is an invaluable device for economists, its real value as noted by Labour Market and Fiscal Policy Director Greg Jericho, is how it highlights the massive cost of the Stage 3 tax cuts.

    In his Guardian Australian column, Jericho notes that the Stage 3 tax debate has become about all-or-nothing rather than realising the $300bn cost of the tax cuts over 9 years provides an opportunity for the Albanese government to amend the tax cuts and also increase support for benefits and government services.

    The Stage 3 tax cuts are so expensive that the PBO’s budget tool reveals you could raise Jobseeker from its current rate of $668 a fortnight to $1,925 and the budget deficit in 2032-33 would still be lower than it is currently predicted to be with the Stage 3 tax cuts.

    The Stage 3 tax cuts could be amended to reduce the 32.5% tax rate for earnings between $45,000 to $120,000 to 30% and still raise the top tax threshold from $180,000 to $200,000. These still very large tax cuts would cost $120bn less over the first 9 years than would the Stage 3 cuts. That would enable the government to, for example, increase Jobseeker to $1,025 and still have a better budget position than current predicted with the Stage 3 cuts.

    This highlights just how many options are available to the government.

    Budget are about choices, government is about choices. The Albanese government has a massive choice to make – either continue with the Stage 3 tax cuts that massive hit the budget for little reason other than to hand wealthy people a huge tax cut, or it can take this opportunity to create a fairer economy and society.

    The post A new tool reveals how badly the Stage 3 cuts mismanage the budget appeared first on The Australia Institute's Centre for Future Work.