Latest GDP figures show inflation being driven by profits

The health of the economy was revealed this week with the release of economic growth figures showing the economy grew at a better-than-expected rate of 2.6% for 2025. This compared to the forecast of just 2.2%.

But economics is truly the dismal science and these economic growth figures have sparked further talks about another interest rate rise.

You see the RBA is worried about inflation and they’re convinced that it is being driven by too much demand in the economy. So, stronger economic growth is a sign that households are out spending too much.

The figures do show that household spending was up. It shows they splashed out on travel, entertainment, and they took advantage of the black Friday sales.

But all this extra consumption will just make the RBA grumpy. The spending will require more workers to create all the extra things that people want. The RBA believe the labour market is tight, which is central bank speak for not enough unemployed people. They fear that more demand will lead to higher wages, and those higher wages will cause higher prices.

But from the same figures we can see that workers are not getting massive pay rises. But the additional revenue from the higher prices must be going somewhere. If it is not going to wages, then where is it going?

The answer is profits. The latest uptick in inflation is being driven by businesses taking advantage of the better economic conditions to pad their profit margins.

This is one area of inflation that the RBA does not want to talk about.

They are much more comfortable with the idea that inflation is being driven by workers demanding higher wages. They would probably even prefer inflation from a one-off supply shocks rather than profit driven inflation.

So, what can be done about inflation being driven by higher profits?

Well, businesses can get away with this because of a lack of competition. Businesses fighting in a competitive market can’t just increase their prices.

To fix this we need to strengthen competition laws. Stronger powers for the ACCC, the ability for the government to break up big businesses that dominate markets, windfall profits tax to take away those profits and help people badly affected by higher prices.

What is probably not going to do much is increasing interest rates every time the economy picks up and big businesses go on a price gouging bender.

The figures released this week also showed that most of the growth in spending is coming from private spending and private investment. The ABS mentioned data centres again as a driver of private investment.

Government spending also increased, but its growth continues to slow. State and local government made up for most of the growth, particularly in spending across health, education, and police. The notable increase from the Federal Government came from defence.

A stronger economy would usually be a good thing, but not with the RBA hovering in the background, with its finger on the interest rate button. Don’t be surprised if they raise rates and blame the stronger than expected economy.

But inflation is being driven by rising profits and might further increase because of a supply shock because of the illegal attack on Iran. This will particularly be the case if the war drags on. Any increase in rates is not likely to do much except cause more misery for mortgage holders.