Profit-Price Spiral: The Truth Behind Australia’s Inflation
As of the September quarter of 2022 (most recent data available), Australian businesses had increased prices by a total of $160 billion per year over and above their higher expenses for labour, taxes, and other inputs, and over and above new profits generated by growth in real economic output.
Without the inclusion of those excess profits in final prices for Australian-made goods and services, inflation since the pandemic would have been much slower than was experienced in practice: an annual average of 2.7% per year, barely half of the 5.2% annual average actually recorded since end-2019.
That pace of inflation would have fallen within the RBA’s target inflation band (equal to its 2.5% target plus-or-minus 0.5%). Even within the RBA’s own policy rule, therefore, current painful interest rate hikes would be unnecessary.
