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Research Suggests Australian Corporate Profits to be the Primary Cause of Inflation

Research indicates that Australia’s high inflation is primarily the result of anomalously high corporate profits, with studies conducted by the OECD and The Australia Institute concluding that even with recent declines in profits correlating with a drop in inflation, high corporate profits continue to account for the majority of inflation seen in Australia.

A line graph showing several overlapping and correlating lines, with the text "Corporate Profits Driving Inflation" foregrounded.

15 OECD nations were analysed as part of the OECD’s 2023 Economic Outlook. The volume, released in June of 2023, included findings which “confirmed what many economists around the world have argued that profits have been the major driver of inflation,” according to Greg Jericho, Policy Director for the Centre for Future Work.

In a discussion on inflation and the decline in real wages and disposable incomes, the publication stated that anomalous profits had been seen across the energy, agricultural, manufacturing and service sectors:

“The weakness of household incomes, and the associated pressures on household purchasing power, have prompted concerns that the high rates of inflation seen in the past year have been due in part to firms raising their profits rather than simply passing on higher input costs. A decomposition of the factors contributing to the rate of growth of the GDP deflator – an indicator of domestically-generated price pressures – suggests that increases in both unit profits and unit labour costs help to account for the upturn in inflation, albeit to a different extent across countries… A significant part of the unit profits contribution has stemmed from profits in the energy and agriculture sectors, well above their share of the overall economy, but there have also been increases in profit contributions in manufacturing and services.”

Mr. Jericho, writing for The Australian Institute, stated that the OECD’s research was consistent with studies completed by the Centre for Future Work and the Australia Institute itself which also found that corporate profits were “overwhelmingly” driving inflation in Australia.

In September of 2023, the Australia Institute released a report, Profit-Price Inflation: Theory, International Evidence, and Policy, which found that although Australian corporate profits had begun to decline in recent months, matching with a slight fall in inflation, these profits overall remained well above historic norms and “account for the clear majority of inflation since the pandemic.”

Dr. Jim Stanford, Director for the Centre for Future Work, agreed that the evidence was obvious that the profits of corporations were at the centre of the current cost-of-living crisis:

“The evidence couldn’t be any clearer: enormous corporate profits fuelled the inflationary crisis and remain too high for workers to claw back wage losses… Real wages in Australia saw the largest and fastest fall since the Second World War, yet the usual suspects in the business community want to blame labour costs for inflation. That claim simply doesn’t stack up under the weight of international and domestic evidence that shows corporate profits still account for the clear majority of excess inflation, despite inflation moderating from its peak last year... There is abundant Australian and international research confirming that companies in many industries, not just mining, were able to increase prices far above their costs, fuelling the surging inflation that rippled through the economy and now threatens it with high interest rates and possible recession .”

Dr. Stanford’s September 2023 report, Profit-Price Spiral: The Truth Behind Australia’s Inflation, concludes that Australian corporations have taken advantage of recent social upheavals, such as the COVID-19 pandemic, by lifting their prices to customers above and beyond what would be expected based upon their own input purchases alone:

“Corporations have increased their profits much faster than the nominal growth of Australia’s economy, and hence increased their share of GDP significantly. As Australia was traversing an unprecedented series of economic, social, and public health challenges (including lockdowns, supply chain disruptions, and accelerating inflation), corporations lifted prices far above and beyond the cost of their own input purchases. The excess expansion of profits per unit of production (that is, the amount of profit built into average unit prices for all goods and services produced in Australia) accounts for the lion’s share (69%) of the acceleration in inflation beyond the RBA’s 2.5% target rate. Growth in labour compensation beyond what would normally be expected (given economic growth and target inflation) has played a small role: accounting for just 18% of this above-target acceleration in inflation.

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