Australia: Greedflation concerns are overstated in Australia

The recent blame put on rising company profits as a key driver of consumer price inflation in Australia is overstated. We are not wholly convinced by claims of a causal relationship between profits and inflation as has been widely reported. Company profits have increased steadily (and faster than labour income). But we think this is more likely a consequence of strong demand, which is driving both price inflation and company profits.

Key points:

• The evidence presented to date for a profit-price spiral has some major shortcomings. It conflates different price measures in the economy, which overstates the level of profits generated from Australian consumers. Moreover, the runup in company profits to date has been strongest in the resources sector. This has very limited implications for the consumer price index and Australian consumers. Profit margins in the non-mining sector have been little changed since 2019.
  
• More fundamentally, the most frequently cited evidence cannot distinguish whether rising profits are the cause of price inflation, or simply a by-product of strong demand. Based on the evidence to hand, we agree with the RBA and Treasury’s conclusions that strong demand remains a more plausible explanation for the current inflation episode.
  
• The profit-price spiral argument is backed by a report from the Australia Institute (TAI) that attributes price growth in the economy into a return on capital (profits) and a return on labour (wages). Price growth above the mid-point of the RBA’s target range is considered ‘excess’, and profits are cited as accounting for over 65% of ‘excess inflation’.