Research by the OECD as part of its 2023 Economic Outlook has confirmed what many economists around the world have argued that profits have been the major driver of inflation

The OECD research has decomposed the GDP of 15 nations and found that “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”.

This finding comes off the back of the OECD noting that “the upsurge in inflation in 2021-22 has led to declines in real wages and, in many countries, household disposable incomes.”

While the GDP deflator that is the inflationary measure used in the national accounts is not perfectly replicable with the CPI, the OECD notes that it is an “indicator of domestically generated inflation, and can shed light on the extent to which headline inflation is domestically generated or imported”.

The OECD confirmed that the current inflation scenario is unlike those in the past.

It found that “a large part of the higher unit profits contribution originates from mining and utilities, even in commodity-importing economies”. The suggestion that Australian mining and energy company profits have little impact on inflation has always been a very tenuous argument and the OECD report makes it clear that these companies do indeed drive inflation.

It also found that the current period of inflation “is unlike the 1970s in that GDP inflation was generally much higher in the 1970s, notably on account of stronger increases in unit labour costs”.

The research is consistent with previous work done by The Australia Institute and Centre for Future Work which found that profits in Australia were overwhelmingly driving inflation. The OECD research uses the same methodology as in our papers and should cause the Reserve Bank to question its current approach to monetary policy which involves targeting labour costs.