Over the past few years, the RBA has steadfastly denied that price gouging by companies with significant market power has been driving inflation. They know that if this reality is acknowledged, the 11 rate hikes they have enacted since May 2022 are unjustified. It's clear that companies are pushing up profit margins – where prices are rising more than costs are rising. The Reserve Bank of Australia has nevertheless rejected this claim and claimed that wage pressures and excessive demand from businesses justified a rate hike, although the evidence did not support this. On Tuesday (February 6, 2024), a new study found massive price gouging by businesses across all sectors of the Australian economy, with many operating in highly privatized industries (e.g. aviation, electricity, childcare, banking Industry). Systemic rises in profit rates are an important contributor to persistent inflationary pressures. The findings leave the RBA with no justification for unjustified interest rate hikes that have transferred billions of dollars to the financial elite at the expense of low-income mortgage holders.
On April 5, 2023, the then Governor of the Reserve Bank of Australia spoke at the National Press Club in Sydney and said in his prepared speech: Monetary policy, demand and supply – He said:
…While businesses on average have been able to pass on higher costs and maintain profit margins, inflation is not driven by expanding profit margins.
In the question-and-answer session that followed, he elaborated on the growing suggestion that inflationary episodes are driven by corporate profits rather than wage demands (Q&A record):
… Profit growth is not the source of the inflationary pressures we face. Outside the resource sector, the proportion of national income devoted to profits has remained essentially unchanged. I think what's happening now is that demand is strong enough to allow companies to pass on higher input costs to prices, so, with the exception of construction, companies' profits are not declining because of higher costs. But most industries have been able to pass on higher input costs into higher prices and maintain profit margins. Therefore, the rising share of profits as a share of national income is not the source of inflation; It's a supply-side issue and strong demand in parts of the economy due to the pandemic response. This is our interpretation of the data, and we looked at it very carefully.
The RBA has long claimed it is witnessing wage pressures that are spreading into accelerating price inflation – a claim that has been unable to be supported by official data.
The chart below shows annual real salary growth from 2005 to the September quarter of 2023 (the latest data available).
What we have observed during the recent period of inflation is a systematic drain on the real purchasing power of nominal wages in Australia.
There is nothing to suggest that the “saw-tooth” pattern points to genuine wage resistance by workers who are able to at least partially reverse the drain on purchasing power through successful wage claims.
This pattern was particularly prominent during the inflationary period of the 1970s, which was protracted because of a distributional struggle between labor and capital over who would bear the loss of real income from rising prices for imported oil.
In years past, such struggles were less evident.
Therefore, any notion that excessive wage demands would justify rising interest rates from May 2022 is not borne out by the data.
The RBA also claimed that they raised interest rates because inflationary pressures reflected excess demand and they had to increase unemployment to curb “excess” spending.
Once again, this is difficult to prove when examining official data.
The May 2023 Monetary Policy Statement provides dedicated analysis— Box B: Do corporate profits cause inflation? – They further push the profit argument:
There is little evidence of broad-based growth in domestic non-mining profit margins, suggesting that changes in domestic profit margins are not a significant independent cause of rising headline CPI inflation… At the corporate level, profit distribution has changed little. These observations are consistent with businesses generally passing on higher costs to maintain profit margins, with aggregate inflation being driven by the balance of supply and demand factors rather than changes in corporate pricing power.
As evidence mounted against this view, the RBA adjusted its stance.
For example, in – Reserve Bank Board Monetary Policy Meeting Minutes (June 6, 2023) – The Reserve Bank of Australia stated:
… Members observed that some companies were linking their prices, implicitly or directly, to past inflation. These developments raise the risk that high inflation will persist, which will make it harder for the economy to stay on its narrow path.
So this is a small concession – an acknowledgment that companies are using their pricing power in the market to ensure that inflationary pressures persist.
The current RBA governor has proven to be a huge disappointment – see yesterday’s blog post – The RBA is now a rogue organization and the government should take action to curb it (February 7, 2024) — About her shift on NAIRU.
New report finds massive price gouging in Australian economy
However, a major report released on Tuesday (6 February 2024) revealed just how lacking the RBA's statement was.
That report – Investigation into price gouging and unfair pricing practices ——Written by Professor Alan Firth, former Chairman of the Australian Competition and Consumer Commission.
I was taught by Alan on my Masters course at Monash University and he supervised a special reading unit on price setting that I did during the course.
The study was commissioned by the Australian Council of Trade Unions, who have clearly seen workers' real purchasing power being systematically undermined by inflation and know that businesses are exploiting inflation and its market power to drive up profit margins.
So they wanted to conduct an independent study to verify what they were seeing on “the streets.”
The research covers:
….a wide range of industries including banking, wholesale electricity and retail pricing, early childhood education and care, supermarkets and electric vehicles.
The RBA claimed that only mining profits improved.
The study concluded that prices paid locally had “increased significantly” but this was not justified by rising costs.
In other words, businesses are expanding their profit margins, and that push drives changes in the consumer price index.
The study found:
1. “The exercise of market power and restrictions on competition in specific markets exacerbates what is already a global problem.”
As a result, the initial supply constraints that emerged as a result of the pandemic and subsequent situation in Ukraine were amplified as companies with excessive pricing power drove up profits.
2. “Prices in Australia are often too high, reflecting the lack of full and effective competition in many markets. Not only are many consumers continually being overcharged, but 'profit push' pricing has also contributed significantly to inflation in recent years.”
3. “There is a gap in current government policy. Not enough attention is paid to high prices. It needs to. It needs to investigate and expose its causes and address them where possible: ineffective competition, vulnerable consumers, and exploitative business pricing practices.”
4. “Price gouging in the electricity industry is of great concern and the industry is highly concentrated at all levels.”
This is a highly privatized sector, and the government promises lower prices and better services in private hands when it is sold.
The reality is just the opposite.
“At the generator wholesale level there was “routine price gouging as it sets prices in the bidding system” and “the bidding system used to determine energy prices is not fit for purpose”.
“At the transmission level of the industry, there has historically been overpricing” – in part because of weak regulatory structures and poor enforcement.
“At the retail level (which is accompanied by a high degree of vertical integration with power generation suppliers), there is very severe price discrimination between businesses and consumers that is difficult to explain in terms of cost differences.”
The complexity of retail products is designed to make it difficult for consumers to understand the “best price in the retail market.”
5. “There is a serious lack of competition in the banking industry, and the status of major banks is protected by various agencies of the Financial Supervisory Commission in the pursuit of stability.”
The Big Four banks are generating returns that are at odds with global trends – they “charge high prices quickly, engage in unfair pricing practices and exploit their positions in highly complex industries”
6. “The Australian aviation industry is a duopoly, dominated by Qantas, which has engaged in price gouging.”
In fact, Qantas alone has made a significant contribution to changes in the Consumer Price Index over the past few years through price gouging.
7. “Both the early childhood education and care industries have problems with overcharging, which is mainly due to market design and the difficulty of users switching services.”
Again, this is partly due to the abandonment of public childcare centers in favor of privatized arrangements.
8. Supermarkets have formed an oligopoly, systematically overcharging and pushing profits.
– Corporate profits drive up inflation significantly, with some businesses wielding outsized power over their customers, supply chains and workers.Number
– Many businesses are adopting dodgy pricing practices, including loyalty taxes, trickle-down pricing, excuse inflation, rocket-and-feather strategies, and confusion pricing.
– Lack of competition or regulation across a range of industries, leading to poor consumer outcomes and higher prices.
So when the research was completed, the results were clear – price gouging was being systematically used to extract profits in all major sectors of the economy.
This also means that interest rate increases aimed at calming excess demand completely miss the point and will only further harm indebted consumers who are already squeezed by profit fraud.
Alan Fels' report is a disgrace to the RBA, which has systematically denied the existence of price gouging in the Australian economy.
What is clear is that the RBA has used its position to mislead the public and present itself as an authority, when in reality it has been captured by the financial elite who have profited significantly from the latest round of rate hikes.
That's enough for today!
(c) Copyright 2024 William Mitchell. all rights reserved.