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RUBY:

From Schwartz Media, I’m Ruby Jones. This is 7am.

Australia has seen a series of record corporate profits posted in the last few weeks.

But they come as millions of average Australians are being squeezed. Mortgage repayments, rent, and the cost of almost everything is up – while wages are not keeping up.

So how are corporations posting record profits right now? What’s the impact on the prices we’re paying? And why is it that the only answer to inflation is rate hikes?

Today, national correspondent for The Saturday Paper, Mike Seccombe, on how corporate profits are driving the cost-of-living crisis.

It’s Wednesday, March 1.

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RUBY:

Mike, last year, prices started to go up pretty quickly and they're still increasing. It's clear that the cost of living crisis, it's continuing on. And during this time we've heard warnings and the big one is that if wages were to rise to keep up with the cost of living, then that would make the situation worse. So could you just explain that to me? The idea of a wage price spiral?

MIKE:

Sure. It's pretty simple, really. Prices go up. So then people want more wages so they can buy the same amount of stuff, so they get more wages, and then that pushes prices up in turn. And so hence the spiral, you know, one chases the other up. That's the idea. So last year, of course, prices did start to go up quite, quite sharply. The Reserve Bank likes to have an inflation rate somewhere in the range of 2% to 3%, and obviously we're way past that. We're well over 7%. So the Reserve Bank governor, Philip Lowe, began warning about the risk of this wage price spiral. Basically saying that if wages started rising at/or above the rate of inflation, then you'd get more demand and that would push up inflation even higher. So he wanted wages to stay roughly within that target band. The interesting thing is that just recently, in recent weeks, he's made a small semantic change, which is that instead of talking about a wage price spiral, he started talking about a price wage spiral.

RUBY:

So, Mike, what is the difference, then, between a wage price spiral and a price wage spiral?

MIKE:

Well, it at least acknowledges that the primary driver of Australia's inflation is not wages. Wages have not been rising very fast at all. And yet, in spite of this Lowe and the RBA continue to insist that there will have to be more interest rates, and they will be needed to combat inflation to try and rein in, you know, consumer spending in particular. And the RBA continues to warn that a breakout of wage rises is a significant concern and that it would jeopardise what they're trying to do to curb inflation.

RUBY:

Okay. So the RBA, the Governor is changing his language slightly, it sounds, but the message is essentially the same that we should be worried about what might happen if wages were to rise. But I know that last week we got some new data Mike, and that gives us a much clearer picture of what's actually happening with wages in Australia. So tell me what we found out.

MIKE:

Well, what we found out is that workers' pay rose by just 0.8% in the three months to December, which brought it to, I think about 3.3% for the year, which is not that far above, when you think about it, what the Reserve Bank aims to have inflation running at.

This is all the more significant because the December quarter, 0.8% was well down on the preceding quarter's 1.1%, and well below what the RBA itself expected. So far from wages spiralling upwards, they're actually moderating.

Meanwhile, as wage growth is well below what you might expect, the cost of living continues to rocket upwards.

So the maths here is pretty simple and pretty compelling. Prices are up 7.8%, wages are up 3.3%, so that means the average worker was 4.5% worse off at the end of last year than they were at the beginning. And the RBA itself, in its February statement on monetary policy, said wage rises have, quote, “so far remained consistent with its long term inflation target.” So it doesn't sound much like a wage price spiral or even a price wage spiral, whichever way you want to look at it. It doesn't even look like there's much connection here between prices and wages at all. But something has been going up, obviously, and could be a big contributor to the inflation we're seeing, and that is profits, corporate profits.

RUBY:

Okay. So what kind of corporate profits have we been seeing lately? How significant are they?

MIKE:

Well, we've had a huge raft of them and they've been a bit shocking, frankly, if you're worried about inflation. The obvious example is the Commonwealth Bank.

Archival tape – Reporter 1:

“Australia's biggest bank has unveiled a record breaking profit as rising interest rates provide an opportunity to boost the bottom line.”

MIKE:

The CEO, Matt Comyn, reported a record profit of $5.15 billion for just six months to December.

Archival tape – Matt Comyn:

“Certainly the Commonwealth Bank is in a very strong position to support our customers and the broader economy.”

MIKE:

So that's the Commonwealth Bank.

Archival tape – Reporter 2:

“And NAB's first quarter trading update revealed an 18.7% jump in cash earnings growth in the corresponding period last year.”

MIKE:

One day after the Commonwealth Bank result came out. The National Australia Bank's chief executive, Ross McEwan, posted a record profit of $2.15 billion for the half year.

Archival tape – Ross McEwan:

“From a relative position, we're in good strength, but it's going to feel like we are having more difficulties because the growth has slowed down.”

MIKE:

Then there's Australia's two biggest retailers, Coles and Woolworths.

Archival tape – Reporter 3:

“Coles improved on last year's results despite inflation, labour shortages, and global supply chain issues.”

MIKE:

Coles reported a $643 million profit in the last half of last year, which was 17% up on the year before.

Archival tape – Reporter 3:

“About a fifth of customers struggling with their budget are making it up in the discount aisles buying a lot more items like Coles $1 pasta.”

MIKE:

And the next day Woolworths announced its profit was up 907 million or 14%.

Archival tape – Reporter 4:

“The supermarket giant says it's benefiting from the economic climate, thanks to Australians cutting fast food and restaurants and spending more on groceries to eat at home.”

MIKE:

and between the two of them, these two supermarkets account for around 70% of the grocery trade.

So to continue the litany.

Then there's Qantas, which on Thursday announced a $1.43 billion profit for the half year.

Archival tape – Alan Joyce:

“Making money is good because we can invest in the business, invest for customers, invest for shareholders, and invest for our employees, for our intelligence of people…”

MIKE:

So as you can see, there's just some enormous profit results coming down the pipe.

RUBY:

And so when we talk about these profits and how they might be contributing to inflation, can we kind of break down what it is that we're actually saying here? Is it the case that the shareholders in these corporations, they're getting the profits — they're getting the billions of extra dollars — which means that they have this spending power that they didn't have before and that that's what's driving it up?

MIKE:

Well, spending power is part of it.

Of course, there's also the direct impact, Right? So, you know, if they jack up the price of petrol and the gas, and electricity, and groceries, etc., that drives up the rate of inflation. But they also indirectly drive up the cost of living.

Those shareholders are getting billions of extra dollars in their pockets to spend. And not only does this sort of defeat the purpose of raising interest rates, it’s also fundamentally inequitable.

Shareholders tend to be high income folks, while the price impacts of interest rate rises fall most heavily on low income folks. To bring it back to the Reserve Bank continually raising the spectre of excessive wages driving up inflation. Well, there's no evidence for that. And the interesting thing here is that the RBA has had very little to say about the role of excessive profits. And there's mounting evidence that this is what is driving inflation, or at least a large part of it.

RUBY:

We’ll be back after this.

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RUBY:

Ok, so Mike, can we just get into the connection between corporate profits and inflation a bit deeper here? When we say that the evidence is mounting, that it's profits that are actually driving inflation, what are we talking about here? What evidence is there?

MIKE:

Well, I spoke to Rod Sims, former head of the Competition Commission, about this, and he said he has no doubt that in large measure because the Australian market is so concentrated, you know, we have, four big banks, we have two big supermarkets, we have a few big energy retailers, and there's not sufficient competition, which means that they are able to to jack up prices more easily. And he says it's hard to tell without specific data exactly which ones are really gouging us. But he has no doubt that it's happening. Last week, Dr. Jim Stanford, who's the director of the Australia Institute's Centre for Future Work, published an interesting report where he went back and looked at the inflation data. Since the start of the pandemic through to about September last year. And on the basis of his analysis, 69% of the inflation over that period — above the Reserve Bank's 2% to 3% target range — was down to rising corporate gross profits. And on his calculation, only 18% was due to wages and other compensation going to workers. So, you know, you can see the discrepancy here. What's contributed more to inflation? It's excessive profits. It's not excessive wage demands.

And Interestingly the banks are not even pretending that it's anything other than them. Gouging is perhaps a harsh word, but increasing their margins. Commonwealth Bank implicitly acknowledged it was screwing its customers, saying that its inflated bottom line was in large measure, and I'm quoting here, “driven by a recovery in net interest margins in the rising rate environment.”

What that means, putting that more simply, is that as the rates have gone up, the banks have taken advantage by jacking up the amount of interest they charge their borrowers much more than the amount that they pay to people with savings accounts.

So essentially they have taken advantage of the rising rates to increase their lending margins.

RUBY:

Okay. So Mike, the situation as it stands then is the RBA is using interest rate rises to try and bring down inflation, but that really targets household spending because people can't spend as much on other things when they're trying to pay off these bigger mortgages. But rate rises, they don't hit corporate profits. In fact, they kind of enable them in the case of the banks. So it kind of seems like things aren't really adding up. Is it the case that rate rises are not actually the right tool to control inflation right now?

MIKE:

Well, That's certainly what a number of people think. And it's certainly what the Greens Senator Nick McKim thinks.

Archival tape – Nick McKim:

“What do you say to the renters and the mortgage holders of Australia who are getting smashed by interest rate increases while the major banks are pulling in mega profits?”

MIKE:

He gave the governor of the Reserve Bank a very hard time in estimates.

Archival tape – Philip Lowe:

“What do I say to…”

Archival tape – Nick McKim:

“The renters and mortgage holders.”

Archival tape – Philip Lowe:

“Well we recognise it’s really difficult if you’ve got a mortgage and interest rates go up…I get a lot of people writing to me at the moment telling me about their personal circumstances and it’s really tough I understand that.”

MIKE:

And way back on February seven when the RBA announced it was raising the cash rate again for the ninth time in ten months. McKim, who is the Greens treasury spokesman, issued a statement demanding that the Albanese government override the bank and reverse the rate increase.

And his argument was that the burden of high interest rates was falling most heavily on the people who can least afford it. That is mortgage holders, renters, workers, to some extent small businesses, although some of them are doing okay as well, I might add.

And at the same time, he noted, the share market was at a near record high and he said this blast of interest rates was never the right response to inflation driven by supply shocks and corporate profiteering.

If a war in Ukraine is driving up energy costs, well, raising interest rates in Australia is not going to do much about it. Right? Because it's an entirely external problem. Warwick McKibbin, who's a professor of economics at the ANU Crawford School and a former member of the Reserve Bank board, says the Government has kind of sought to make the RBA the scapegoat. Making it wear the blame for wielding the only tool that it has to control inflation, which is interest rates. And he told me, he said this is not a new phenomenon. People have been dumping everything on the Reserve Bank as a policy maker of last resort for a long time and it's got worse since he left, he said.

RUBY:

Okay, so it sounds like his point is that the Reserve Bank really only has this one tool at its disposal, raising rates, and that's what it's doing. But presumably the federal government, they could and should do more to bring down inflation in a way that's fairer?

MIKE:

Well, they certainly could. But the levers that the government can pull tend to act more slowly than interest rates. And also they're harder to get through. So, you know, you couldn't increase taxes month by month by month like you can with interest rates. And furthermore, I imagine you would encounter an awful lot of resistance in the parliament and it would be very hard to get through.

But there are a number of things the government could do. It could, for example, slash its spending, or it could increase taxes, or it could bring in price controls, or a variable rate on high income earners, perhaps set independently a bit like the Reserve Bank sets rates independently. You could have an independent body that adjusted a sort of levy on top of normal taxes to take cognisance of what the economic position is at any given time.

In this way you would be much more targeted because you would actually be directing your tax rises to the people who are benefiting at the top of the scale rather than the people who are suffering at the bottom. So there's a lot of things that could be done. You could bring in super profits taxes, which, I might add, is one that's been recommended by an awful lot of very credible people.

We could be cutting the generous subsidies that we currently give fossil fuel companies.

The thing is that the government has taken, I guess you would say, the chicken approach here, preferring to blame the, quote, “independent” unquote. They always say independent Reserve Bank.

And the bank has only this one tool, which is interest rates, which hits workers.

But the bottom line here and on the data of the past few weeks is that workers wages are not, repeat, are not at the root of our inflation problem.

RUBY:

Mike, thank you so much for your time.

MIKE:

Thank you for having me.

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RUBY:

Also in the news today.

Rupert Murdoch has admitted that several Fox news hosts endorsed the “big lie” - that is, the conspiracy that the 2020 election was stolen from Donald Trump.

The admission comes from court documents made public in a $1.6 billion defamation suit brought against the Fox Network by Dominion Voting Systems - who made electronic voting machines used during the election.

The documents reveal Murdoch told the court, quote, “I would have liked us to be stronger in denouncing it in hindsight”

And,

The government has announced plans to alleviate national debt by increasing the concessional tax rate for people with more than 3 million in super.

The Prime Minister said the increase from 15% to 30% will apply to around eighty thousand Australians. The move is expected to add around 2 billion dollars into the budget each year when it comes into effect in 2025.

I’m Ruby Jones, this is 7am. See you tomorrow.

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