Profit-Price Spiral an Inconvenient Truth for Big Business: Economists

Despite a mainstream shift in the national conversation away from baseless claims of a “wage-price spiral”, some big business proponents and conservative economists appear unwilling to accept the economic evidence of a profit-price spiral.

New media reports today quoting former Australian Competition and Consumer Commission Chair Rod Sims have reaffirmed the findings of Australia Institute research showing excess profits from companies like Coles and Woolworths are significant contributors to inflation.

Key Points:

“That the business lobby has been unable to disprove a single number from our research is a testament to the careful, evidence-based nature of our work,” said Dr. Jim Stanford, Director of the Centre for Future Work and report author.

“It’s notable that many of the voices now seeking to cast doubt on the evidence behind a profit-price spiral were silent during the prolonged rhetoric on the existence of a wage-price spiral.

“The report ‘Profit-Price Spiral: the Truth Behind Australia’s Inflation’ contained new macroeconomic data confirming that increasing profit margins per unit of real output in Australia’s economy account for a strong majority (over two-thirds at that time, based on September quarter 2022 data) of above-target inflation since the outbreak of the COVID pandemic in early 2020. The data we presented on the surge in profits, coincident with rising inflation, is clear, sourced to ABS data, and has not been challenged.

“The RBA’s internal correspondence about our report (released as part of a freedom of information request) in fact replicated and verified our finding that rising profit margins account for the bulk of increased nominal valuations in Australia, comparing end-2019 to late-2022.

“Macroeconomic trends since then (including December quarter 2022 data released after our initial report) confirm that unit profit margins are still elevated.

“Contrary to the view of some Australian commentators, numerous high-quality research reports from think tanks, universities, and even central banks in other countries have confirmed the importance of rising profit margins in explaining the acceleration of inflation since the COVID pandemic, using methodological approaches similar to our own statistical decomposition. We cited several of those complementary studies in our follow-up report, Profits and Inflation in Mining and Non-Mining Sectors, and other similar research has been published more recently.

“The main thrust of the critical commentary on our report has not been to challenge its empirical findings on the rapid increase in profits, but rather to deny that any generalised increase in profitability has been the cause of the inflation. Some claim that the rise in profits has been limited to the mining sector, which somehow doesn’t ‘count’ – even though products produced by that sector (including petrol, gas, and other fossil fuels) have been a leading source of recent inflation.

“Our subsequent research showed that profit margins have also increased (albeit less dramatically) in several non-mining sectors. Others claim that swollen profits are just a side-effect of inflation that was caused by other forces (usually including supposed excess wage growth or consumer disposable incomes). That debate over the direction of causation is rather moot: the undeniable reality is that profits are at all-time record levels in Australia, while workers’ real wages continue to decline.

“Business peak bodies who argue for continued wage suppression desperately want to hide the reality that they have profited from the inflation that is causing a crisis in living standards. This explains their interest in trying to challenge our findings.

“The Australia Institute stands by its research. Arguing about the dimensions, causes, and remedies of the inflation problem is a normal part of the national economic debate. We look forward to similar scrutiny being applied to those arguing that wages are driving inflation in Australia.”