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The Guardian - AU
The Guardian - AU
Business
Greg Jericho

Inflation may be falling but business’s drive to maximise profits fuelled Australia’s cost-of-living nightmare

Coles and Woolworths
The ACCC has alleged what most of us suspected – that Coles and Woolworths raise their prices in such a way as to make it seem like it is actually a sale. Composite: AAP/Getty

This week came the evidence that governments can reduce inflation. We also saw evidence that companies don’t actually set prices responding to market forces but in an effort to maximise profits, using their power to raise prices and increase inflation.

Earlier this year, when the government announced its energy rebate, economists who wanted a recession to reduce inflation argued that inflation falling due to government rebates was not real, just “measured” inflation.

This, of course, was bulldust – sorry, that should be measured manure.

Inflation is the measurement of the increases in prices that households pay for things. How that occurs – whether due to government intervention, supply side issues, or companies raising prices to maximise profits – does not make it any more or less real.

And so the monthly inflation data out yesterday (which admittedly is always a bit less accurate than the quarterly figures) showed inflation over the past year rose 2.7% – within the RBA’s target of 2% to 3%:

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A significant reason for the drop from 3.5% in July was the federal government’s energy bill relief fund (EBRF) rebates, and the rebates in Queensland, Western Australia and Tasmania.

The Bureau of Statistics estimates that had these rebates not been in place, on average the cost of electricity would have been 36% higher. Or, to put it another way, the amount of electricity that in June 2023 cost on average across Australia $100, now costs $86 due to the rebates, but would cost $117 without them:

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Is that real? Well it sure as heck would feel real to people paying for electricity.

At any rate, the “trimmed mean” measure of “underlying” inflation fell from 3.8% to 3.4% – marginally above the 3% ceiling of the RBA’s target – hardly a worrying level at all.

But the point about “real” inflation also became pertinent this week when the ACCC alleged what most of us suspected, that Coles and Woolworths raise their prices in such a way as to make it seem like it is actually a sale.

Last year, when my colleagues and I at the Australia Institute argued that high inflation was overwhelmingly due at the time to increased corporate profits, the RBA and other conservative economists became very upset at the suggestion that companies could actually raise their prices for reasons other than supply and demand.

The ACCC’s action shows that Coles and Woolworths were not only allegedly raising prices and pretending it was a cut, they were doing this at the time that inflation was peaking.

They might be fake discounts, but they were real price rises – and that led to inflation.

The governor of the Reserve Bank, Michele Bullock, told reporters on Tuesday that it was “quite possible that some individual firms might have used opportunities of strong demand to more than pass on any increases in costs and increase their profit margins”.

On this score, I think you can say it is worth noting the profit margins of Coles and Woolworths are rather healthier now than before the pandemic:

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But Bullock also kept to the line that profits did not drive higher prices because “in aggregate” profit margins excluding mining (which apparently have no impact on prices, which is news to anyone with a gas bill) had not risen.

Except when we look at the aggregate profit margin of the non-mining sector, it’s pretty clear that the past four years have been good for companies.

In the 10 years prior to the pandemic, the average profit margin across the non-mining sector was 10.2%; since March 2020 it has been 11.2%. That works out to around an extra $129bn in profit over the time:

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Arguing that extra profit did not increase inflation is to give companies a very big pass and instead continues to blame workers and consumers for inflation as though we somehow go into Coles or Woolworths and haggle over the price of things.

What the ACCC’s case also makes clear is that neither company sought to actually compete against the other – instead they just copied each other.

Anyone who does the shopping will know for example that Coles and Woolworths take turns having items on sale. The most obvious examples is soft drink – one of the biggest selling products and as such an item designed to “get people in the door”.

The Google Chrome extensions developed by Adam Williamson that tracks the prices in the online stores of both Coles and Woolworths show just how Coles and Woolworths work (even if they are not technically colluding):

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Not only do Coles and Woolworths take it in turns having Coke and Pepsi on special, they also make sure that neither has both Coke and Pepsi on special at the same time.

There’s nothing illegal about this, but it is rather a curious coincidence that neither breaks the pattern.

The crucial thing is that it shows the two majors are not in competition with each other but ensure they always have either Coke or Pepsi on sale.

Why does this matter? Assume you own an independent supermarket – you are in effect competing against both Coles and Woolworths, and both supermarket giants ensure you are always competing against a sale price.

It’s the same story on washing liquid – although less perfectly as with Coke and Pepsi:

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I could do this for many items – margarine, Milo, Weetbix, and on and on.

These prices are real, the inflation they drive is real – but the competition is fake.

  • Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work

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