Economic modelling is a central element of economic and policy debate in Australia. Yet the assumptions that underpin the most commonly used macroeconomic models are rarely discussed even though they fundamentally influence model results. Too often, models are used as a tool of persuasion rather than providing objective policy advice.

New research confirms that corporate profits in Australia, despite recent moderation, remain well above historic norms, and must fall further in order to allow a rebuilding of real wages in Australia that have been badly damaged by recent inflation.

Labour costs have played an insignificant role in the recent increase in inflation, accounting for just 15 percent of economy wide price increases while profits have played an overwhelming role, accounting for about 60 percent of recent inflation.