Every inflationary episode embodies a power struggle within society over who benefits from inflation, who loses out – and who will bear the cost of getting inflation back down.
That’s because inflation never affects all prices and incomes evenly. Some prices shoot up, while others grow slowly or decline. Some incomes keep pace with rising prices (or even outpace them), while others lag far behind. Thus the impacts of inflation are always uneven. And this sparks economic and political controversy.
This distributional conflict is readily visible in current Australian inflation. As prices took off after the lockdowns, corporate profits surged dramatically, reaching their highest share of GDP ever by 2022.
Meanwhile, wages – which were historically weak even before the pandemic – lagged far behind. In the last two years, consumer prices rose 12.5% (and more for essentials, like food and energy). Average wages grew less than half as much – barely 6% – in the same time.
That means the purchasing power of workers’ wages is falling. It’s the biggest and fastest real wage cut in postwar history – and record profits from those higher prices are the corollary of workers’ falling real incomes.
Despite the fact that wages have lagged, not led, recent inflation, the powers-that-be are still targeting workers to bear the brunt of the anti-inflation effort. The Reserve Bank is now using high interest rates to cool off employment and slow wage growth.
This inflation has produced clear winners, and clear losers. So it’s a myth to proclaim that inflation “hurts all Australians,” pretending we can all join together in a shared national effort to wrestle prices to the ground.
Our Centre for Future Work published research showing just how lopsided the impacts of inflation have been in Australia. We analysed official national accounts data from the ABS, including income flows, output data, and changes in average economy-wide prices.
From end-2019 (just before the pandemic) to September 2022 (latest data at the time), higher corporate unit profits accounted for 69% of excess inflation (over and above the RBA’s 2.5% target). Unit labour costs accounted for just 18%, and other stakeholders (including small business) the remainder.
This confirmed that workers are the victims of inflation, not its cause, and raised big questions about the RBA’s determination to target wages (not profits) for tough anti-inflation medicine. Our findings sparked widespread interest and anger. So business peak bodies, and business-friendly commentators, have launched a steady stream of attacks against our report since its release in February.
RBA and Treasury officials also disagree with our conclusions. They have not challenged our actual numbers: indeed, internal RBA memos replicated and confirmed our finding that wider corporate profit margins account for the lion’s share of higher prices since 2019.
But despite this evidence, these officials deny soaring corporate profits are a concern in the anti-inflation battle. Profits grew most dramatically in the energy and mining industries, they say. This is certainly true – due in part to sky-high prices paid by Australians for petrol, gas, and other resource-intensive products. So we can’t magically exclude this super-profitable sector from our analysis of inflation, nor our plan for tackling it.
They also claim profits outside of mining have not increased. This is false: non-mining profits have been less spectacular than resources, but profit margins have widened significantly, reinforcing inflation. Consumers are reminded of this every time they visit a supermarket, book an airline ticket, or try to rent an apartment.
In sum, these arguments cannot deny that business has profited mightily from the current inflation – especially, but not solely, in energy and mining – while workers have suffered.
A flip side of this class conflict over inflation was starkly visible last week, when the Fair Work Commission announced a 5.75% increase in Award wages. That doesn’t quite keep up with inflation, but it sure helps.
Within minutes, the same corporate lobbyists so offended by our research, lined up to denounce the wage increase as inflationary. They want Australia’s lowest-paid workers, whose living standards have already declined, to sacrifice further. Little wonder business peak bodies hate ay public attention on their own record profits.
The blame game over inflation will get more heated in the months ahead. Inflation is likely to ease, as many of the unique post-pandemic factors (supply chains, energy price shock, pent-up demand) that underpinned firms’ price increases gradually abate. But real wages have fallen – and workers, understandably, want to repair that damage.
So workers will demand wage gains in excess of inflation. And by all rights, they deserve that. That need not cause further inflation, especially if record high profit margins come back to earth.
Corporations, however, want to sustain their record profits as long as possible. They want to keep wages down, and the RBA seems determined to help. So buckle up: the great Aussie debate over inflation is just getting started.
Jim Stanford is Economist and Director of the Centre for Future Work at the Australia Institute, and the author of Profit-Price Spiral: The Truth About Australia’s Inflation.