My Blog

Tag: Macroeconomics

  • Fels Review Confirms Corporate Practices As Key Drivers of Inflation

    Key points:

    • The Australia Institute and its Centre for Future Work, which were among the first to identify the role of record-high corporate profits in driving the acceleration of inflation after the COVID lockdowns, made a major submission to the Fels inquiry and appeared before its public hearing in Melbourne in September 2023
    • A 2023 Centre for Future Work report showed that over two-thirds of excess economy-wide inflation (above the RBA’s 2.5% target) from end-2019 through the September quarter of 2022 was attributable to higher unit corporate profits.
    • Australia Institute reports documented that the rise in profits was strongest in industries with concentrated or strategic power in the broader economy: including mining and energy, manufacturing, construction and wholesale trade.

    “Prof Fels’ careful review confirms that price-setting strategies by corporations, including many obviously unfair and exploitative practices, have contributed significantly to the cost-of-living crisis afflicting Australian households,” said Greg Jericho, Chief Economist for the Australia Institute.

    “Since the current inflationary cycle began after COVID lockdowns, there has been too much attention on wages, labour costs, and consumer spending as the supposed drivers of higher prices. The RBA and other policy-makers have been too slow to acknowledge the role of profit and greed in pushing up prices.

    “This inquiry marshals abundant evidence from official statistical agencies, international economic organisations, think tanks and academic research to show that corporations have taken advantage of the pandemic and its aftermath to exploit consumers and drive up inflation.

    “Prof Fels’ report contributes to a more accurate understanding of what is causing the cost-of-living crisis, and a more balanced and fair strategy for solving it.”

    “Australian corporate profits have moderated in the last year, as supply chains were repaired and energy prices retreated. This has been crucial to the partial slowdown in inflation experienced in the same time.

    “But further reductions in prices for many essential goods and services are required to fully repair living standards, and Prof Fels’ recommendations for more exposure of excess prices and stronger competition measures to reduce them would help a lot.”

    The post Fels’ Review Confirms Corporate Practices As Key Drivers of Inflation appeared first on The Australia Institute's Centre for Future Work.

  • Higher exports prices improve the budget, but the Stage 3 tax cuts remain the wrong tax at the wrong time

    Yesterday’s mid-year economic and fiscal outlook (MYEFO) provided some pleasing news for the Treasurer, Jim Chalmers. But higher revenue does not mean a stronger economy nor that households are better off.

    While the Treasurer was releasing the latest budget numbers the annual figures for median earnings were released by the Bureau of Statistics.

    These figures showed that the median weekly earnings in August this year were $1,300 – a rise of 4.2% from last year, which was less than the 5.4% increase in inflation.

    That weekly amount translates to $67,600 in annual earnings.

    People earning that amount will get just $565 from the Stage 3 tax cuts (0.8%) while someone on $200,000 – well in the top 10% of earners will get a 4.5% cut worth $9,075.

    The Treasurer told ABC 730 on Wednesday night that the government has not changed its position on Stage 3 and that “We think there is an important role for returning bracket creep where governments can afford to do that.”

    The problem is the Stage 3 cuts are mostly focused at rewarding those on high incomes, who are least affected by bracket creep.

    If the Government was truly worried about using the bonus revenue from higher export prices to assist low and middle-income earners it would care more about those on the median income of $66,700 than those in the top tax bracket and top 10% of income.

    The post Higher exports prices improve the budget, but the Stage 3 tax cuts remain the wrong tax at the wrong time appeared first on The Australia Institute's Centre for Future Work.

  • After two years of profit-led inflation, workers deserve the pay rises they are getting

    The latest wage growth figures showed that workers’ wages for the past six months have grown faster than inflation. As Labour Market Policy Director, Greg Jericho writes in his Guardian Australia column, this should be celebrated. We need to shed our fear of wage rises. For too long any sign of increasing wage growth has been viewed as something to be stomped on while ever-increasing corporate profits have been cheered.

    Since the start of the pandemic, workers’ purchasing power has crashed, and the only way to recover the lost real wages is through wages increasing faster than inflation.

    The 1.4% growth of private-sector wages in the September quarter was driven largely off the back of the Fair Work Commission’s decision to increase Award wages by 5.75% and the decision to give aged-care workers a 15% pay rise.

    As a result around 40% of those who gained a pay rise in the September quarter received one greater than 4%.

    One other pleasing sign has been the relaxation of public sector wage caps has allowed those workers around the country to get a fairer pay rise, but their increases remain well below that of the private-sector.

    The profit-led inflation since 2021 hurt workers, and it now is only fair that they receive some recompense. After a decade of ever falling wage growth and a pandemic and recover that smashed real wages, it is very good news that workers are finally getting their fair reward.

    The post After two years of profit-led inflation, workers deserve the pay rises they are getting appeared first on The Australia Institute's Centre for Future Work.

  • The Government needs to act on Stage 3 as the RBA warns about wealthy households spending

    The Reserve Bank’s decision to raise interest rates on Tuesday lacked any clear reasoning.

    When compared with other periods such as during the mining boom, when household spending was growing fast and real wages were surging, we can see that the economy at the moment is much weaker. Households are now cutting back on luxuries as their real wages fall.

    But the RBA pointed out that one group of Australians are doing OK – those with high income and wealth. Those with large savings buffers and who are also enjoying the increased wealth from rising house prices are still spending.

    This is also the group who are about to be handed the biggest income tax cut in history. The Reserve Bank has made it clear that allowing Stage 3 to go forward in its current form will only fuel inflation and likely result in higher interest rates for all.

    With a Reserve Bank desperate to use any excused to raise rates and slow the economy even as it already slows, the Government needs to amend the Stage 3 cuts to deliver greater benefit to low-middle income households who have suffered the most from the rising cost of living and interest rates, and less to those who are already doing well and for whom a potential $9,075 tax cut would just put more fuel on the inflation fire.

    The post The Government needs to act on Stage 3 as the RBA warns about wealthy households spending appeared first on The Australia Institute's Centre for Future Work.

  • When the prices of necessities are rising fast, the RBA does not need to hit households with another rate rise

    In the past week, the likelihood of the Reserve Bank raising the cash rate to 4.35% has gone from about 20% prior to last week’s inflation figures coming out, to now an even-money bet.

    But when you look at the cost of living figures out this week it is clear that households are already having to reduce their spending on non-discretionary items.

    Out of the 14 biggest contributors to inflation, 10 were non-discretionary items.

    At this point we should note the comments of the secretary of the Treasury, Steven Kennedy, last week in Senate estimates. He was asked about the pathway to a “soft landing” – ie where inflation falls without us going into a recession.

    He noted that chances of a soft landing were made harder by recent rises in oil prices because “on the one hand, it will increase headline inflation by raising petrol prices. On the other hand, it may well reduce growth and see other prices fall because people have less to spend. At least in the short term, expenditure on petrol is not very discretionary.”

    When the prices of things you can’t avoid paying for rise faster than others, then that obviously reduces your ability to spend elsewhere. In this way petrol, electricity and rental price rises have the same impact as do interest rate rises.

    The most recent figures of the volume of retail spending will come out tomorrow, but we know that the volume has been falling, and is now back to pre-pandemic trend levels:

    This of course is what you would expect – when the cost of non-retail items such as petrol, mortgages, rents, electricity, property rates, medical services and insurance are rising, you are going to buy less in the shops.

    Since March last year the cost of mortgages has gone up 114%. Does the Reserve Bank think households haven’t really noticed that?

    Even you if discount the record low rates during the pandemic, the cost of mortgages is now about 70% higher than it was at the end of 2019. Since then, wages have risen only about 10.5%.

    Another rate rise is not going to do anything other than add to the cost of necessities. It would not so much reduce inflation as increase the cost of living and hit households whose wages and incomes continue to be worth less than they were a year ago.

    The post When the prices of necessities are rising fast, the RBA does not need to hit households with another rate rise appeared first on The Australia Institute's Centre for Future Work.

  • The Reserve Bank should not raise rates on Melbourne Cup Day

    The latest CPI figures showed inflation grew 5.4%, down from 6% in the June quarter and almost a third below the peak of 7.8% at the end of last year. And yet commentators seem desperate for the Reserve Bank of Australia to raise interest rates next month to show it is tough on inflation. But raising rates now would not be tough, it would just be cruel.

    The annual growth of inflation is falling quite quickly – down from 7.8% at the end of last year. But because the quarterly growth of inflation rose in the September quarter, a numbe rof commentators and economists have been suggesting that the Reserve Bank should raise interest rates in two months.

    But when you examine the drivers of inflation in the September quarter, there is little that would have an impact from higher interest rates.

    Automotive fuel prices accounted for 20% of the growth in inflation in September – that is completely unaffected by rate rises given that it was all due to higher world oil prices due to OPECD restricting supply. Similarly rental prices, electricity, property rates and charges, insurance, tobacco and beer prices have nothing to do with interest rates. Even the cost of building a new home is driven mostly by the increased cost of construction materials from overseas.

    Crucially in the September quarter the cost of “non-discretionary item” rose 1.4% while the cost of “discretionary” item rose just 0.7%. Non-discretionary items are things which you cannot avoid paying (at least in the short-term). In effect those price rises have the same impact on consumer spending as do rate rises – they reduce the ability of people to spend money on things in shops and on discretionary services.

    Had the RBA raised interest rates more in the September quarter there would have been negligible impact on the main drivers of inflation, raising them in November due to these latest figures would just be cruel and hurting people whose real wages continue to fall.

    The post The Reserve Bank should not raise rates on Melbourne Cup Day appeared first on The Australia Institute's Centre for Future Work.

  • Inflation remains headed in the right direction despite higher oil prices

    The latest monthly CPI figures out on Wednesday showed a slight increase in the annual growth of inflation, but policy director Greg Jericho writes in his Guardian Australia column that the Reserve Bank should not use it as an excuse to raise rates next week.

    While CPI rose from 4.9% to 5.2%, the monthly figures can be quite erratic and thus it is best to also take note of the measure that excludes volatile items and holiday travel (which can exaggerate movement son a monthly basis). On this measure, annual inflation feel from 5.8% to 5.5%.

    The big driver of inflation in August was a 9% jump in automotive fuel prices. And indeed much of the inflation over the past 2 years has come from overseas increases in world prices of commodities and of course companies taking advantage to increase profit margins.

    The latest figures show that once again there is very little that the RBA can do to limit these price rises. While a higher exchange rate might ameliorate some of the increases, it is always foolish for the RBA to attempt to increase the value of the dollar by raising interest rates. Any changes in the value of the exchange rate due to another rate rise would likely be small and temporary.

    The new Governor of the RBA, Michele Bullock should recommend the RBA board look through the monthly movements of the CPI and note that inflation here is following largely the same path as that in the rest of the OECD. Raising rates now would only serve to punish households for an increase in prices that had no link with wages or the level of demand in Australia economy.

    The post Inflation remains headed in the right direction despite higher oil prices appeared first on The Australia Institute's Centre for Future Work.

  • Opening statement to the ACTU Price Gouging Inquiry

    The Director of the Centre for Future Work, Jim Stanford and policy director and chief economist of the Australia Institute, Greg Jericho, presented evidence at the inquiry based on their research into profit-led inflation. Below is an edited excerpt of their opening statement.

    The recent period of rising inflation has been highly unusual coming as it has after a period where in Australia, core inflation by June 2021 had not been above the Reserve Bank’s target range of 2% to 3% for more than a decade and had been below 2% for five and half years.

    Perhaps unsurprisingly, because of such a long period without rising inflation, we saw very much a default to the thinking of the 1970s and a belief that all inflation is primarily driven by demand factors that need to be limited by higher interest rates.

    This was a fundamental misunderstanding of this inflationary period. It clearly could not be driven by wages because wages at all stages over the past two years have grown on average by less than inflation, such that real wages are now 5.5% below what they were two years ago.

    Wage growth in the 12 months to June this year was just 3.6%, still well below the CPI of 6%, and far from accelerating, actually had fallen from 3.7% growth in the 12 months to March.

    Thus, the question becomes, if not wages, what?

    Our research in February this year revealed that the initial surge of inflation in Australia beginning in mid-2021 was closely associated with a surge in price pressures.

    Business profits were the dominant manifestation of that inflation. The supply shocks that occurred because of the pandemic lockdowns and Russia’s invasion of Ukraine allowed companies in some key industries (such as energy, logistics, and manufacturing) to significantly boost their profit margins, coincident with rising prices.

    Our February 2023 paper, using the decomposition method of the national accounts (as explained by Jim), concluded that since the end of 2019, 69% of unit price increases over and above the RBA’s 2.5% inflation target mid-point were attributable to increased nominal unit profit payments. Only 18% was attributable to higher nominal unit labour costs, and the rest to increases in other nominal factor payments.

    Our paper noted that the profit growth was most dramatic in the energy and resources sector. These findings were broadly consistent with the findings of earlier research by the Australia Institute, as well as with the similar decompositions of inflation reported in other countries.

    Our follow-up report in April confirmed the leading role played by profits in the energy and resource industries. It noted that products from that sector (including petrol, gas, and other fossil fuel-intensive products) were leading sources of domestic inflation in Australia. It also showed that profits in other sectors, such as wholesale trade (56%), manufacturing (38%), professional and technological services (37%) and construction (37%), had also increased as a share of non-mining GDP since the pandemic. This profit growth is not dissimilar from the 48% growth in mining profits during the same period and well in excess of the 27% increase in nominal GDP.

    This confirmed that firms across these sectors have more than simply passed on higher input costs to consumers. As American economist Isabelle Weber has argued, they amplified them.

    The release of two more quarters of national accounts since February allows us to update our figures, which find that despite recent falls in corporate profits in some sectors, higher unit profit payouts still account for over half (56%) of the cumulative increase in nominal unit prices in the Australian economy since December 2019, above and beyond what would be expected due to normal target inflation. The role of higher unit labour costs in overall unit prices has increased in recent quarters and now accounts for just over one-third (35%) of the cumulative above-target rise in prices since the pandemic.

    The influence of profits is clear when you consider that unit profit costs by June 2023 were 27% above their December 2019 levels (down from 37% above in March 2023), while unit labour costs are just 14% above December 2019 levels – pointedly just below the 15% growth in CPI.

    There have been some suggestions by the Reserve Bank and others that our research should exclude mining profits as these do not significantly influence Australian inflation. Profits in mining during this time accounted for over half of all corporate profits in Australia; obviously, if over half of corporate profits are excluded from consideration, then profits will obviously seem less important.

    We reject the argument that mining profits somehow “don’t count” – especially in regard to domestic inflation, given the critical role played by higher petrol, gas, and electricity prices in driving the initial post-pandemic surge in Australian consumer price inflation.

    Clearly, there is a strong connection between energy prices, energy industry profits, and inflation experienced by domestic consumers (not to mention inflation experienced in other sectors of the economy).

    The good news is that corporate profits have begun to moderate in the first half of this year. It is important to note the modest decline in gross operating surplus in some sectors has still left corporate profits as a share of national GDP well above pre-pandemic levels and far above longer-term post-war averages.

    Nevertheless, even the partial moderation of record corporate profits has been associated with a significant and welcome deceleration of inflation. Consumer price inflation in Australia has slowed by over half in the last nine months: from an annualised peak of 8.9% in the first quarter of 2022 (led by surging energy costs) to just 3.4% in the June quarter of 2023 (not much higher than the top of the RBA’s target range).

    Moreover, even in the later stages of this current inflation cycle, with profits stable or even falling and labour costs accelerating, it’s wrong to conclude that labour is now the ‘source’ of inflation: clearly, the rise in unit labour costs reflects efforts by workers to recoup real income losses experienced earlier in the inflationary cycle, which must still be ascribed to the initial profit-led shocks that started the whole process.

    Blaming workers now for inflation because they are pursuing higher wages to recover lost living standards is like blaming a homeowner whose house has been set on fire for using too much water to put out the flames.

    Even as it appears to be moderating, this period of inflation requires a rethink of our policy approaches.

    We have made a number of policy recommendations, including:

    • Price regulations in strategic sectors
    • Fiscal transfers (such as windfall profits taxes combined with cost-of-living transfers to vulnerable households)
    • Competition policy reforms
    • Supports for wage increases in excess of current inflation for a sustained period of time to allow the repair of recent real wage reductions.

    The biggest lesson from this period is that we need more policy tools in our inflation toolkit. Relying on monetary policy and higher interest rates only works if you think inflation is only ever produced by higher wages and strong aggregate demand.

    We know that the future is more likely than not to feature further global shocks – not the least from climate change. Policymakers and central banks need to learn from the past two years and ready themselves to treat the broader causes of inflation and protect workers and households when companies seek to use crises as an opportunity to lift prices.

    The post Opening statement to the ACTU Price Gouging Inquiry appeared first on The Australia Institute's Centre for Future Work.

  • Profit-Price Inflation: Theory, International Evidence, Policy

    The report, compiled by Dr Jim Stanford (Economist and Director of the Centre for Future Work), with contributions from several other economists at the Centre and the Australia Institute, confirms that higher corporate profits still account for most of the rise in economy-wide unit prices in Australia since the pandemic struck.

    The good news is that corporate profits have begun to moderate, as global supply chains are repaired, shortages of strategic commodities dissipate, and consumer purchasing patterns adjust after the pandemic. This has occurred alongside a reduction in inflation of over half since early 2022 (falling from a peak of 8.9% annualised in early 2022 to 3.4% by June 2023). This further confirms the close correlation between corporate profits and inflation — but both profits and inflation need to fall further.

    The report also reviews the methodology and findings of over 35 international studies confirming the existence of profit-led inflation across many industrial countries (including Australia). The methodology and findings of these studies are very similar to that utilised by the Australian Institute and the Centre for Future Work in previous research on profit-led inflation.

    The international research includes reports from numerous established institutions (including the OECD, the IMF, the Bank for International Settlements, many central banks, and the European Commission). Using similar methodology, these institutions came to similar conclusions: namely, that historically high corporate profits were the dominant factor in the initial surge of global inflation after COVID.

    The report was submitted on 21 September as evidence to the ACTU’s Price-Gouging Inquiry, headed by Prof Allan Fels. This Inquiry is gathering documentary evidence on how Australian workers and consumers have faced exploitive and unfair pricing practices by Australian corporations, which have added to recent inflation and undermined real wages. The new report provides macroeconomic evidence confirming the relevance of the Inquiry’s terms of reference.

    Policy-makers in other countries (including Europe and the U.S.) agree that corporate profit margins need to fall further in order to continue reducing inflation, while allowing real wages to recover to pre-pandemic levels. The new report shows this is also true in Australia. Average real wages are presently 6% lower than in mid-2021 (when post-pandemic inflation broke out, led by higher prices and corresponding super-profits in strategic industries like energy, manufacturing, and transportation).

    Wages will thus have to grow significantly faster than inflation for a sustained period of time to recoup those losses. That can occur while still reducing inflation if historically high profit margins are reduced to traditional levels.

    The post Profit-Price Inflation: Theory, International Evidence, and Policy Implications appeared first on The Australia Institute's Centre for Future Work.

  • The weak economy shows the Reserve Bank is not threading the needle

    The latest June quarter National Accounts released yesterday showed that without the increase in population, Australia’s economy would have shrunk for two consecutive quarters. This, as Policy Director, Greg Jericho writes in his Guardian Australia column, reveals just how weak our economy is, and how massively households have been hit by the 400 basis points rise in the cash rate.

    The Reserve Bank has talked about trying to thread the needle of lowering inflation and delivering a soft landing. But with GDP per capita falling and real household disposable income per capita now 5% below where it was a year ago, it is becoming harder to suggest the RBA has achieved its aim.

    Even when including population growth GDP only rose at all because of government spending and investment. The private sector is struggling as companies run down their inventories rather than build up supplies in the hopes of increased sales in the months to come.

    The household savings ratio is now as low as it has been since the GFC as households do what they can to pay the costs of essential items and reduce their purchase of discretionary goods and services.

    The Reserve Bank sought to dampen demand from a misguided view that demand was driving inflation. Instead, we know that inflation has largely been driven by international prices and costs and from companies taking advantage of the situation to increase their profits.

    Rather than focus purely on inflation the RBA and the government now need to be most wary of rises in unemployment. We are not in a recession yet, but should the economy continue to fail to grow aside from population unemployment will inevitably rise, and the cost of the RBA’s strategy will be felt even more so by households across the country.

    The post The weak economy shows the Reserve Bank is not threading the needle appeared first on The Australia Institute's Centre for Future Work.