Wages not to blame for Australia's rising inflation

Corporate profits, not labour costs, have had the most significant impact on Australia’s rising levels of inflation, according to an international investigation of the latest research data.  

The Australia Institute this month released a discussion paper analysing the purported role wage growth has played in driving up inflation in recent years. The report applied methodology developed by the European Central Bank to Australian GDP data from 2005 to the present.

The results illustrated that wages have played a trivial role in driving up prices in Australia over the last three years. Higher profits are a far more culpable factor for our soaring inflation rate.

The Australian Bureau of Statistics reports that the Consumer Price Index (CPI) rose 2.1% during the first quarter of this year and is up 5.1% for the 12 months to March 2022.

Below is the decomposition of Australia’s GDP deflator by wages, profit and net taxes. The GDP deflator measures the changes in prices for all the goods and services produced in an economy.

The analysis shows that prices have been outpacing wages and other costs of production for years, bringing forth a sustained increase in the share of GDP accruing to profits. The recent outbreak of inflation has exacerbated this trend, according to the discussion paper.

The figures show that between 2013 and 2021 labour costs were mostly negligent in affecting inflation and wages generally contributed less than half of the GDP deflator prior to 2013. Throughout 2021 and 2022 labour costs accounted for 15% of the total increase in the GDP deflator, while profits were responsible for approximately 60% of the upsurge.

In a speech delivered after the May cash rate hike Reserve Bank of Australia (RBA) governor Philip Lowe said, “evidence received over the past month through our business liaison and various business surveys has indicated that there is now stronger upward pressure on labour costs and that this is likely to continue.”

In contrast, the discussion paper findings indicate real wage growth in Australia is at historically low levels and has been spiraling since the beginning of the global pandemic in March 2020. The graph below compares nominal wage growth (WPI) against real wage growth since 2005.

In a press statement this week Federal Treasurer Jim Chalmers warned of further, unanticipated cuts to real wages in the months ahead, widening the gap between increasing costs of living and shrinking net pay.

The Treasurer conceded that "wages aren't the problem" for spiking inflation but specifically ruled out introducing a windfall profits tax - a one-off tariff levied against companies making exceedingly high net earnings.

The ongoing impact of COVID-19 and abrupt increases in global energy prices owing to Russia’s invasion of the Ukraine have put pressure on inflation, according to the report.

The Australia Institute inferred that while businesses and firms must set prices sufficient to cover their costs of production, many that have exceeded this indicator continue to raise prices to maintain, or increase, their profits. The research firm suggests competition policy and other policies designed to control prices have a significant role to play in reducing inflation.

Although real wage growth is in steep decline Australia’s minimum wage is set to increase as of the new financial year, with the lowest-paid workers receiving a $40-a-week pay rise. Plus, a triple cash rate hike of 0.75% may be on the horizon next month, according to one major bank. What is the likelihood that this will actually happen?

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