Donald Horne famously branded us "a lucky country run by second-rate people who share its luck." If you’ve been to a supermarket, filled up your car, or paid a bill lately, you probably feel that your luck has run out. But while Australians are tightening their belts, one part of the economy is buckling up for a bonanza—corporate profits. Let me explain.
After COVID, Inflation, as we know, surged to levels unseen since the early 1990s that "recession we had to have". But the real question is: what’s driving it now? The Australia Institute recently released a fascinating analysis that puts corporate profits squarely in the spotlight. It turns out that since the pandemic began, businesses have pocketed an extraordinary $100 billion in profits above their pre-pandemic margins.
By comparison, according to the OECD's Employment Outlook 2024 published earlier this year, real wages in Australia are 4.8% lower than they were in the last quarter of 2019. Real wages are the average weekly earnings for full-time employees, adjusted for inflation.
While Australia was one of 16 countries in the study that went backwards, the majority of the 35 countries grew wages and across the full set of economies studied real wages were up 1.5 per cent.
Profit takers fuel inflation
Here's the real rub, though. That $100 billion in profts "above and beyond" is not just a tidy sum—it accounts for over half of the inflation that’s pushed prices beyond the Reserve Bank of Australia’s (RBA) target range of 2 to 3 percent.
How did this happen? Well, the pandemic and Russia’s invasion of Ukraine disrupted global supply chains, pushing up costs for businesses. But instead of just passing those costs on to consumers, many companies took the opportunity to pad their margins. Coles and Woolworths, for instance, are now enjoying profit margins well above pre-pandemic levels.
Now, here’s where Australia’s economic structure comes into play. We’re a nation dominated by duopolies and oligopolies—two big supermarkets, two big airlines, four big banks. This concentrated market power means less competition, which means companies can lift prices with little fear of losing customers. As former ACCC chairman Allan Fels has put it, this fosters “exploitative pricing practices.”
The RBA’s response to all this has been, as usual, to raise interest rates—13 times since 2022. The idea is that higher rates cool demand by making mortgages and other loans more expensive. But here’s the problem: if inflation is being driven by corporate profits and external shocks, not consumer spending, rate hikes are like using a hammer to fix a screw. They’ll hurt households and risk tipping the economy into recession without addressing the real issue.
So, what can we do? The Australia Institute has a few ideas, and they’re worth considering. We need tougher competition laws to break up monopolistic markets. Price controls could be implemented during emergencies to prevent profiteering. And perhaps the most radical idea: a super-profits tax on industries making excessive margins. The revenue could help households hit hardest by rising prices.
Ultimately, if we want to get inflation under control, we need to stop treating it as just a monetary policy problem. It’s also a structural problem. Corporate profits have become a key driver of inflation in Australia, and until we address that, households will continue to feel the squeeze.
Remember that next time the government talks about the need to make sacrifices for the greater good. And remember also that Australia's business duopolies and oligopolies are adept at privatising profits and socialising losses. It's the only kind of socialism they can stomach.
Acknowledgment: This analysis is based on research from the Australia Institute. You can find their full factsheet here.
