Profits Causing Inflation in Australia, Not Wages: European Central Bank & ABS Data Reveal

New research shows that only a trivial portion of Australia’s inflation has come from wages this year, while rising prices continue to drive not just inflation, but profits to record highs.

Key findings:

  • Wages made no contribution to Australian inflation in 2019-2020, or 2020-2021, measured using the ABS’s broadest indicator of inflation, the GDP Deflator
  • Wages accounted for only 0.6 percentage points of the 4.1 percent increase in prices so far this financial year
  • Research released today applies the European Central Bank’s methods for analysing the causes of inflation to ABS data

“Australia isn’t experiencing a wage-price spiral, it’s at the beginning of a price-profit spiral,” said Dr. Richard Denniss, chief economist at the Australia Institute.

“The national accounts show it is rising profits, not rising costs, that are driving Australia’s inflation. While workers are being asked to make sacrifices in the name of controlling inflation, the data makes clear that it is the corporate sector that needs to tighten its belt.

“While companies are arguing that they have ‘no choice’ but to increase their prices, the fact that they are making record and rising profits is proof of how many choices they really have.

“It’s a shortage of competition, not a shortage of skilled labour, that is driving up the cost of living in Australia.

“Wages made no contribution to Australian inflation in 2019-2020, or 2020-2021, and accounted for only 0.6 percentage points of the 4.1 percent increase in prices so fat this financial year.

“The European Central Bank recently analysed European price and wage data and concluded that ‘profits have recently been a key contributor to total domestic inflation,’” Dr Denniss said.

The ECB report continues:

“To put it more provocatively, many euro area firms, though by no means all, have gained from the recent surge in inflation. The fortunes of businesses and households have diverged outside of the euro area, too, with corporate profits in many advanced economies surging over the past few quarters.”

The new report “Are Wages Driving Inflation in Australia” is being released as the Australia Institute hosts Joseph Stiglitz, Nobel Laureate and former Chief Economist of the World Bank, on his tour of Australia.  

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