Bloated business profits make up 60% of inflation

Bloated business profits account for 60% of current inflation, while unit labour costs accounted for only 15%, according to Sparrow Loans. 

Director Ulrika Lobo says a change to government policy rather than an oversimplified approach of raising the cash rate will be needed to address the current bout of inflation.
 
Modelling from the Australia Institute suggests that the current squeeze is an avoidable one.

"High demand is leading the RBA to run ahead with its rate increases because people's spending habits are not reacting to higher rates in conventional ways," says Lobo. 

"This is probably because they are not feeling the full effects of inflation yet while enjoying some short-term relief from increased wages," she says.

The current spike in inflation isn't coming from input cost pressures, despite the rate rises; it comes from businesses broadening their profit margins while claiming higher energy costs and wage rises. Rising profits are the primary driver of inflation, not the cost of inputs or excessive demand.

Many Australian corporates say 'they've got no choice' but to lift prices when costs rise. Yet they are lifting prices well above these cost increases.

"Businesses are increasing prices above the change in the cost of inputs, exacerbating the upcoming cost of living crunch," says Lobo.

"Borrowers receive a 32-day notice period before having to pay a higher minimum payment. There is a lag of about two to three months for the larger lenders once they adjust policy and give notice to borrowers. The cumulative effect of all the recent rate rises is yet to be seen," she says.

"While much of the current inflation is avoidable and attributed to profit-motivated businesses, high consumption is causing the RBA to steam ahead with tighter monetary policy leading us into an inflationary spiral."

Lobo says they are acting on the belief that as rates rise, consumption falls as people stop spending on unnecessary purchases.

"An increasing business profit margin is not what the RBA wants; they want 'an increasing price level' related to a market correction and inflation to curb consumer spending before they stop the rate rises," she says. 

Yet consumption remains strong as retail sales hit an all-time high of $34.7 billion in July, up 1.3% from the month before and up 16.5% from last year.

"This also explains CBA's anticipated drop in property values, a warning against aggressive rate rises, affects all property-backed lenders," says Lobo. 

"As a private lender in the market, Sparrow Loans is closely monitoring cost challenges for businesses in anticipation of serviceability challenges. Lenders' response to increasing business costs will determine market liquidity, which buoys the property market," she says.

"Competition policies would have a powerful effect on limiting the rate of inflation given that profits account for the 60% of cost increases."