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Company profits blamed for higher cost of living

·Personal Finance Editor
·2-min read
A composite image of Australian currency and people lined up at a grocery story to demonstrate the rising cost of living.
The cost of living is surging, but what is to blame for higher prices? (Source: Getty)

The cost of living has skyrocketed in Australia and experts are pointing the finger at many different sources.

In recent months, some have been blaming the pressure on companies to lift wages in order to attract workers to fill labour shortages for the uptick in prices.

“We are now at risk of a wages and inflation and interest rates death spiral,” Innes Willox, CEO of Australian Industry Group, said.

“In the current circumstances, there is a clear risk that a high increase in wages without improved workplace productivity would fuel inflation and increase the likelihood of a steeper rise in interest rates to the detriment of growth and job creation.”

But a new research report from the Australia Institute said higher inflation was not the fault of rising wages, but instead the companies that keep pushing prices higher.

“Australia isn’t experiencing a wage-price spiral, it’s at the beginning of a price-profit spiral,” Australia Institute chief economist Richard Denniss said.

“The national accounts show it is rising profits, not rising costs, that are driving Australia’s inflation.”

Denniss said while workers were being asked to make sacrifices in the name of controlling inflation, the data had made it clear the corporate sector needed to “tighten its belt”.

“While companies are arguing that they have ‘no choice’ but to increase their prices, the fact that they are making record and rising profits is proof of how many choices they really have,” he said.

“It’s a shortage of competition, not a shortage of skilled labour, that is driving up the cost of living in Australia.”

The report acknowledged that supply chain issues, spurred by the war in Ukraine, COVID-19 lockdowns and the recent floods in NSW, had put pressure on prices but also found companies had accelerated prices too far.

“In short, while in the long run firms must set prices sufficient to cover their costs of production, there is no direct link between costs of production and prices beyond the desire of firms to maintain, or increase, their profits,” the report said.

“Given that profits currently account for a record share of GDP, there is simply no truth behind the assertion that the Australian corporate sector has ‘no choice’ but to pass on cost increases in full in the form of higher prices.

“Indeed, the rising profit share of GDP suggests that Australian firms have, for some time, been choosing to increase their prices faster than their costs have been rising. By definition this causes higher inflation.”

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