Is The Reserve Bank of Australia (RBA) lying?
Is The Reserve Bank of Australia (RBA) lying? Endless interest rate hikes have been the go-to for the RBA as a solution for rampant inflation. The RBA Governor Philip Lowe is constantly reminding everyone they need to stop spending, not expect a wage increase and tolerate the rate rises – basically, till he’s satisfied. Mr. Lowe argues this is the only way – that is not true.
This pain is only for consumers because they have lived beyond their means and this is the price they need to pay. No other economic lever can be pulled to alleviate the extreme pressure people are feeling it’s all on us. Put simply he is lying. The irony is it is the very companies we are often forced to use that should be held to account. Philip Lowe is not asking them to reduce the price of goods and services from their mega-profits or to tax them more and we should all be asking why not?
Mega profits not consumption driving interest rates
People are often ambivalent about unions and many find unions a scourge on business. However, robust understanding comes from knowing the whole argument and not having blind loyalty to one side of a story. Sally McManus is the Australian Council of Trade Unions (ACTU) Secretary and offers a completely different perspective to Philip Lowe’s.
Australians are constantly told of the importance of big business to the economy but the same rank is not given to working people. Therefore, it is not surprising that employees and ordinary people are expected to do all the heavy lifting in the economy. Indeed, we cannot risk upsetting big businesses because that would be tantamount to societal collapse.
Sally McManus has however stood up and called out Philip Lowe and provided evidence to support her argument. In an interview with ABC Ms. McManus outlines how mega profits, not wage rises need to be addressed as the remedy for inflation. Ms. McManus argues a ‘greed price spiral’ where the mega profits of industries should be targeted and not average people.
The main driver for inflation in Australia is excess corporate profits, not wages. Further, inflation would have stayed within the RBA target band if corporates had not lifted prices through the pandemic. The supposed ‘wage-price’ spiral does not exist. The RBA has exclusively focused on wage restraint but the evidence suggests that interest rates would be far lower today if companies were controlled with the same vigor as consumers.
The evidence is outlined in a report – Profit-Price Spiral – which provides data that is seemingly being ignored by the RBA. The Profit-Price Spiral exposes supermarket giants Woolworths and Coles posted soaring profits, with banks, energy and petrol companies posting similarly soaring returns. Organisations that consumers cannot avoid!
- A Profit-Price spiral is the main driver of inflation in Australia, rather than a supposed “Wage-Price” spiral, which does not exist
- As of the September quarter of 2022 (most recent data available), Australian businesses increased prices by a total of $160 billion per year over and above their higher expenses for labour, taxes, and other inputs, and over and above profits generated by growth in real economic output
- Without the inclusion of those excess profits in final prices for Australian-made goods and services, inflation since the pandemic would have been much slower: an annual average of 2.7% per year, barely half of the 5.2% annual average actually recorded since end-2019.
- That pace of inflation would have fallen within the RBA’s target inflation band (equal to its 2.5% target, plus-or-minus 0.5%)
- Excess corporate profits account for 69% of additional inflation beyond the RBA’s target. Rising unit labour costs account for just 18% of that inflation
- The RBAs 9 back-to-back interest rate rises would have been unlikely without excess profits and prices based on the RBA’s own policy framework
- Real wages in Australia fell 4.5% in 2022, the largest fall on record
“This empirical evidence shows excess corporate profits are the main culprit driving inflation, not workers’ wages,” said Dr. Jim Stanford from the Australia Institute’s Centre for Future Work.
“For Australians doing it tough this data would be aggravating.
“We’ve been told a story that workers need to restrict wage growth and accept a permanent reduction in living standards in order to fix inflation. This evidence shows that’s an economic fairytale.
“ABS data shows that without excess price hikes through the pandemic, inflation would likely be within the RBA target band, and hence there would be no need for the nine extreme, back-to-back interest rate rises that are crushing households and mortgage holders, fuelling the cost-of-living crisis.
“The pain experienced by workers through current inflation contrasts sharply with unprecedented increases in business profitability at the same time.
“Through this episode of post-COVID inflation, real wages have declined rapidly, labour’s share of GDP has declined, and corporate profits have set records. That is completely opposite from the experience of the 1970s when real wages rose, labour’s share of GDP increased, and corporate profit margins fell.
“History confirms that fears of a 1970s-style ‘wage-price spiral’ are simply not justified or grounded. Instead, inflation in Australia since the pandemic clearly reflects a profit-price dynamic.”
Supermarkets, banks and petrol companies have recently posted huge profits:
- On Thursday Qantas posted $1.4b half-year profits, tripling revenues
- On Wednesday Woolworths posted a 25% rise in profits. Supermarket profits have soared on the strength of rapid food price inflation.
- On Tuesday Coles net profit grew 11% in the latest half-year result announced Monday, beating forecasts.
- On Wednesday Santos posted a 221% annual profit
- Ampol, Australia’s largest oil refiner, reported a 30% increase in first-half net profit, buoyed by soaring petrol prices.
- Commonwealth Bank posted a record $5.1b billion profit, up 9%, buoyed by extra interest income from rising interest rates.
The full report is attached so that you can decide whether lumping all the responsibility on consumers is reasonable. The other issue is the sooner these giants contribute the sooner the pain will end!