Australia continues to lag behind other countries in discussing the impact of profiteering on inflation and how to address it.
After a long period of denial, the Reserve Bank (RBA) recently partly caught up with counterparts in Europe and the United States in admitting that firms were lifting prices above inflation — though it characterised this as mere corporate carelessness.
Meantime, the debate has moved on. Both the International Monetary Fund (IMF) and the Bank of International Settlements (BIS) are discussing the need for workers to increase real wages to offset their recent losses of purchasing power at the expense of company profits.
“For inflation to go back to a target of 2%,” the BIS stated last week, “profits on average would need to decline by about 2.5% per year in 2023-24, should real wages rise fast enough to make up for the loss in purchasing power and return to the pre-inflation surge level by end-2025.”
The next day, the International Monetary Fund noted that, given “rising corporate profits account for almost half the increase in Europe’s inflation over the past two years as companies increased prices by more than spiking costs of imported energy”, for workers to recoup their real wage losses “companies may have to accept a smaller profit share if inflation is to remain on track to reach the European Central Bank’s 2% target in 2025”.
European Central Bank head Christine Lagarde was blunter, telling an audience of central bankers last week: “We need to ensure that firms absorb rising labour costs in margins.”
In Australia, where many economists are still recovering from the horror of the federal government’s gas price cap, and continue to froth at the mouth about the Greens’ call for rent controls, such discussion appears forbidden.
Alan Kohler, however, is ahead of the game. He recently wrote about the history of attempts to control prices in Australia, and their failure — except Allan Fels’ campaign of naming and shaming price gougers when he headed the Australian Competition and Consumer Commission (ACCC).
There are other tactics than such moral suasion before we go straight to Swiss-style direct pricing regulation. The French government struck a voluntary agreement with supermarkets to keep grocery prices lower in March, and recently struck a similar deal with food manufacturers. The UK government is discussing a comparable agreement with UK retailers. Voluntary codes are easily circumvented, but behind such agreements is the threat of stronger tactics.
Given Australia’s supermarket sector is far less competitive than in France or the UK, and both Coles and Woolworths have increased prices above inflation to drive up profits, a similar scheme here might have more potential to curb inflation for regular household goods, if not in other sectors of the economy. There are also proven means to make limited price controls, or potentially voluntary price agreements, work more effectively.
The longer-term solution is to improve the competitiveness of key sectors by forcing the break-up of dominant firms and preventing further mergers that would reduce competition even more, but the political appetite for that appears about as small as that for serious price controls — and would take far longer to have an impact. Perhaps threats of much more draconian competition laws could be an effective part of voluntary price agreements.
The challenge of curbing price growth isn’t merely about getting inflation back into the RBA’s target band. As one perceptive economic observer noted in 2018, as wage stagnation inflicted ongoing real wage falls or zero growth on workers:
Flat real wages are diminishing our sense of shared prosperity. The lack of real wage growth is one of the reasons why some in our community question whether they are benefiting from our economic success … The diminished trust in the idea that living standards will continue to improve is a major economic, social and political issue. It underlies some of the political changes we are seeing around the world. It is also making it harder to implement needed economic reform. It is in our collective interest that this trust is restored.
If applicable when real wages are flat, how much more applicable when real wages have fallen dramatically due to companies lifting prices far above where they should be? Policymakers such as RBA governor Philip Lowe would do well to heed such wise words. That’s if he can remember saying them.
