Wages are not responsible for rising inflation in Australia

Corporate profits, not labor costs, had the most significant impact on rising inflation levels in Australia, according to an international survey of the latest research data.

The Australia Institute released a working paper this month analyzing the supposed role that 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 present.

The results showed that wages played an insignificant role in driving up prices in Australia over the past three years. Higher profits are a far more culpable factor in our skyrocketing inflation rate.

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

Below is the decomposition of the Australian GDP deflator into wages, profits and net taxes. The GDP deflator measures changes in the prices of all goods and services produced in an economy.

Analysis shows that prices have exceeded wages and other production costs for years, leading to a sustained increase in the share of GDP going to profits. The recent spike in inflation has exacerbated this trend, according to the working paper.

Figures show that between 2013 and 2021 labor costs have been mostly negligent when it comes to inflation and wages have generally contributed less than half of the GDP deflator before 2013. Throughout 2021 and 2022, labor costs accounted for 15% of the total increase in the GDP deflator, while profits were responsible for around 60% of the upsurge.

In a speech after May’s cash rate hike, Reserve Bank of Australia (RBA) Governor Philip Lowe said: “The evidence received over the past month through our trade liaison and various business surveys have indicated that there is now stronger upward pressure on labor costs and this is likely to continue.

By contrast, the working paper’s findings indicate that real wage growth in Australia is at historically low levels and has surged since the onset of the global pandemic in March 2020. The chart below compares the nominal wage growth (WPI) to real wage growth since 2005.

Nominal wage growth (WPI) versus real wage growth since 2005

In a press release this week, Federal Treasurer Jim Chalmers warned of further unanticipated reductions in real wages in the coming months, widening the gap between the rising cost of living and falling take-home pay. .

The treasurer acknowledged that “wages are not the problem” for soaring inflation, but specifically ruled out the introduction of a windfall tax – a flat rate levied on companies making extremely net profits. students.

The continued impact of COVID-19 and sharp increases in global energy prices due to Russia’s invasion of Ukraine have put pressure on inflation, the report said.

The Australian Institute has inferred that while companies and businesses need to set prices sufficient to cover their production costs, many of those who have exceeded this indicator continue to raise prices to maintain or increase their profits. The research firm suggests that competition policy and other policies designed to control prices have an important role to play in reducing inflation.

Although real wage growth is down sharply, Australia’s minimum wage is set to rise from the new financial year, with the lowest-paid workers receiving a $40-a-week wage increase. Additionally, a triple cash rate hike of 0.75% could be on the horizon next month, according to a major bank. What is the probability of this actually happening?

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