Yesterday’s lower-than-expected 6.1% inflation outcome for the year to June contains some important information on inflation causes — and the stark lack of any way it can be controlled by either monetary or fiscal policy.
The obvious examples are petrol and food. Both are rising not because of high demand from consumers, but because of external factors. “The CPI’s automotive fuel series reached a record level for the fourth consecutive quarter,” the ABS said yesterday. “Fuel prices rose strongly over May and June, following a fall in April due to the fuel excise cut.”
Global energy prices and particularly oil prices are well outside the RBA’s control, and that of Treasurer Jim Chalmers.
So is the weather — food prices are up thanks to the floods and heavy rains along the east coast and the surge in prices of grains and oilseeds after the invasion of Ukraine.
The other big driver over the year was the rise in the costs of building houses. “Shortages of building supplies and labour, high freight costs and ongoing high levels of construction activity continued to contribute to price rises for newly built dwellings,” the ABS said. That is amenable to monetary policy with rising interest rates boosting the cost of mortgages and thus curbing demand.
Reflecting the supply chain problems and the impact of higher energy input costs for business, the ABS pointed out that the price of goods (up 2.6%) continued to rise more strongly than that of services (+0.6%). Supply chain disruptions were in part due to flooding and labour shortages mostly caused by COVID. Like the weather, the pandemic is beyond the direct control of the RBA and the government — although the reluctance of governments to mandate mask-wearing is making the ongoing impact of the pandemic significantly worse.
So other than construction, the problem of strong demand hasn’t featured heavily in any of these causes — nor that of surging wages.
What is noteworthy is the role of business profits in our inflation problem.
For more than a decade, the European Central Bank has been tracking different inputs to inflation in the eurozone — including that of profits. In May, an ECB executive examined the current surge of inflation and concluded:
Many euro area firms, though by no means all, have gained from the recent surge in inflation. The fortunes of businesses and households have diverged outside of the euro area, too, with corporate profits in many advanced economies surging over the past few quarters. Poorer households are often hit particularly hard — not only do they suffer from historically high inflation reducing their real incomes, they also do not benefit from higher profits through stock holdings or other types of participation.
The Australia Institute applied the same ECB methodology to Australia earlier this month and concluded:
For the three quarters of data available for 2021-22, encompassing the current uptick in the CPI, labour costs have played an insignificant role, accounting for only 0.6 percentage points of the 4.1 percentage point increase in the GDP deflator (15% of the total). Meanwhile profits have accounted for 2.5 percentage points of the increase in the GDP deflator (about 60% of the total).
Of course, the Australia Institute would say that — but its estimate echoes an analysis by an economist at the San Francisco Federal Reserve which found that less than one-third of monthly US core inflation, which excludes food and energy, is due to demand, and that the role of supply-driven inflation has grown noticeably in recent months.
What appears to be happening is that businesses are using the cover of higher inflation created by external circumstances — war, climate change, COVID — to increase prices even in the absence of higher input costs, in order to raise profits.
This wrecks the implicit trade-off of the past decade of wage stagnation engineered by business and the Coalition. Australian workers endured a decade of sub-3%, even sub-2%, wages growth, but at least faced very low inflation, meaning real wages didn’t go substantially backwards, just drifted slightly lower. Now businesses are hiking prices but workers are still only getting 2-something per cent wages growth, condemning them to large real wage falls. The shift from incomes to profits that has been a feature of the last decade is thus accelerating.
There hasn’t been much in the way of analysis of this from the RBA — strangely, the bank’s business liaison program hasn’t unearthed admissions of profiteering from corporations. But it’s there in the data — and it too is unlikely to be affected by the RBA’s assault on demand.
