Rising corporate profits are a key factor in Australia’s escalating inflation, the report says

Wages have had little or no impact on Australia’s inflation rate over the past three years, according to a new economic analysis from a leading think tank.

While Treasurer Jim Chalmers had dismissed what he called “looming warnings” from commentators about the impact of rising wages, a report by progressive think tank Australia Institute found that rising corporate earnings were a key factor behind Australia’s rise in inflation.

In the report released on Monday, the institute analyzed national accounts data to show that rising corporate profits had been a key driver of inflation and that wages made “no contribution” to inflation in fiscal years 2019-20 and 2020-21 contributed just 0.6% to Australian inflation this current fiscal year.

“Australia is not experiencing a wage-price spiral, it is at the beginning of a price-earnings spiral,” said Australia Institute chief economist Dr. Richard Denniss.

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

The report notes that wage growth was at a record low, while profit-sharing reached a near-record share of GDP.

“While wage growth was clearly not the driving force behind the recent surge in Australian or global inflation, the ongoing impact of Covid and the sharp rise in global energy prices linked to the Russian invasion of Ukraine clearly has ‘ the report said.

Based on a methodology recently used by the European Central Bank, the Australia Institute analyzed the GDP deflator – another measure of inflation in the economy, distinct from the consumer price index (CPI) – to assess the role of earnings and wages in the headline determine inflation figure.

The report found that between 2013 and 2021, labor costs in Australia “played almost no role in inflation (as measured by the GDP deflator)”.

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This included no effect of wages on inflation in the previous two years and a small effect this fiscal year.

“Meanwhile, gains have accounted for 2.5 percentage points of the increase in the GDP deflator (about 60 percent of the total),” the Australia Institute said.

The report found that prices rose faster than wages and other costs, leading to a sustained increase in profit share.

“Increasing prices in line with or above rising costs is a decision to maintain or increase profit margins in Australia, despite profits as a percentage of GDP near record highs,” it said.

The interplay between wages and inflation became a major factor in the final weeks of the May election campaign after Labor pledged to lobby the Fair Work Commission for a minimum wage increase.

Business groups and some economists claimed that raising wages would exacerbate inflation, but Labor – in the opposition and now in government – maintained that modest wage increases would have no significant inflationary effect.

Chalmers, speaking to Sky News on Sunday, reiterated that position.

“Wages are not the reason we have this inflation. So I don’t share some of the concerns that have been raised about some kind of destructive wage spiral,” he said.

“We still have real wages falling quite sharply. We want these wages to rise sustainably. And that means making the economy more productive so that there are many win-wins for employers and employees and we raise living standards.”

“I don’t share some of those pretty dire warnings about all of this.”

Chalmers reiterated the government’s belief that productivity growth is key to sustained wage increases and said it will be a factor at the forthcoming Canberra jobs summit.

“We hope that the Jobs and Skills Summit will bring people together to tackle these major economic challenges,” he said.

“We are not so naïve as to think there will be agreement on some of these issues, including some wage issues. But we hope and expect, and we want, that some sort of consensus will emerge on skills and labor shortages and strong and sustainable wage growth, training and migration.”

Chalmers said he expects “inflation to get a little worse before it gets a little better. But everyone understands that things are getting better.”

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