Last Friday before the House economics committee, the governor of the Reserve Bank made it clear workers had nothing to do with the current rising inflation, but they are the ones expected to sacrifice the most in order to slow it.
In February, when he last appeared before the committee, Philip Lowe said the RBA’s “forecast is that underlying inflation will increase to 3.25% in the coming quarters, before easing to around 2.75%”.
Now the RBA forecasts a peak of 6% and only easing to 3% by the end of 2024.
So what happened? Not rising wages.
Lowe told the committee on Friday what every worker already knows: “The stronger growth in wages has not been a factor driving inflation higher.”
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Given prices have grown faster than wages for a record eight straight quarters (the previous record was three quarters), this was not the most astonishing revelation.
But it needed to be said.
Even if we exclude the weirdness of the middle of 2020 when prices went backwards, over the past two years, the average ability of people to buy things with their wages has fallen 3.9%:
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But when he turned to the future Lowe did something that the Reserve Bank almost never does – he linked profits with inflation.
Pointedly he did so only in the future tense. He did not seek to blame rising profits for the current level of inflation.
He, as usual, noted the constant fear of wage-price spirals, where higher wage rises lead to higher prices, but Lowe also noted one other very big elephant in the room.
He suggested that “businesses too have a role in avoiding these damaging outcomes, by not using the higher inflation as cover for an increase in their profit margins”.
That, as they say, would be nice.
He even went further arguing that “as long as profit margins don’t rise too much and as long as wages don’t rise too much, inflation will come back down.”
The thing is, while wages have not risen much at all, profit margins have.
Now certainly, the mining industry is a big reason overall profit margins have increased (and is why we very much should have a windfall profits tax in place). But profit margins in the non-mining sector have also increased.
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In the past year the non-mining sector’s profit margins have been above 9%, and only now are coming back to the pre-pandemic level – a level still above that of 2011-2016.
A look at individual industries shows profit margins above pre-pandemic levels in manufacturing, construction, wholesale trade and other services (which includes services like vehicle repair and personal care such as hairdressing).
The retail industry, which is more sensitive to lack of wages growth than other industries, has a margin mostly back at pre-2020 levels after a boom during the pandemic.
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Not all industries are doing well – the accommodation and food services, and the arts and recreation industries have, not surprisingly, lower margins now than they did before the pandemic.
But a lower profit margin is not a loss.
We always hear about the coming dangers of a wages breakout; profits, apparently, should only get bigger.
In its August statement on monetary policy, for example, the RBA did mention profits. It noted “increasing concerns about the effect on profits from rising interest rates”.
I will just note in passing there was much less “concern” about households given the RBA suggested “many households should be well placed to absorb higher prices and interest costs without significantly curtailing consumption.”
The RBA did however mention that “retailers have indicated in liaison that they are now more willing to pass on input cost pressures to consumers, rather than accepting lower margins”.
Gee. Ya think?
And while Lowe did link the impact of profits on inflation in his appearance before the committee last Friday, he also made it clear who was to shoulder the burden of reducing inflation.
At most, he suggested, a slowing economy would naturally lower some profit margins, but the real loss would be for workers.
He told the committee that “we’re going to have a decline in real wages this year” and suggested while that “is difficult” it was “better than the alternative”.
Apparently, the prospect of inflation growth above 3% is so bad, the only solution is real wages falling for three years.
What he did not say was real wages would fall to 2008 levels and have declined 6.5% from where they were in September 2020.
He argued that “next year real wages can be positive again”. But the RBA’s own estimates of wages and inflation growth suggest that by the end of next year, inflation and wages will at best only grow around the same level.
Real wages will have fallen from 2020 until the end of 2023.
And the recovery will be longer.
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Even if real wages grow at the pace they did through the mining-boom decade, workers won’t be able to buy the same amount of things they did in 2019 until 2030.
And that is assuming the rising interest rates and slowing world economy don’t bring on a recession in the meantime.
Apparently though, the alternative is worse.
