Last week, research by the Reserve Bank of Australia (RBA) confirmed that they were wrong in 2023 to criticise research by The Australia Institute, which showed rising profits were the significant cause of inflation in the post-pandemic period.
Tue 1 Sep 2026 01.00 AEST
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Last week, research by the Reserve Bank of Australia (RBA) confirmed that they were wrong in 2023 to criticise research by The Australia Institute, which showed rising profits were the significant cause of inflation in the post-pandemic period.
In May 2022, wage growth and inflation were the biggest economic topics of the election campaign. Then opposition leader Anthony Albanese had announced he would support an increase in the minimum wage in line with inflation (which at the time was 5.1%).
This was met with absolute hysterics from conservatives and pro-business media. Then Prime Minister Scott Morrison suggested it showed Albanese was a “loose unit on the economy” while the AFR told readers that such a pay rise “will crush business”.
It was quite astonishing, if unsurprising, just how vociferously businesses groups and friendly journalists sought to blame wages for increasing inflation at the time.
And yet actual analysis of the data, as was done by Richard Denniss, Matt Saunders and David Richardson in July that year, showed the main driver of inflation was not wages but profits.
As more data was released across 2022, this became even more evident.
In February 2023, Jim Stanford, then with the Centre for Future Work, building on the work done by Denniss, Saunders and Richardson, found that the impact of excess profits on inflation was so great, that had profits not risen so excessively, inflation since the pandemic would have risen at a mere annual average of 2.7% – i.e. within the RBA inflation target range of 2% to 3%.
As I wrote recently when the OECD confirmed Australia Institute research in its most recent Employment Outlook, the paper set off an absolute fire storm, and the attacks on the Institute were loud and from powerful forces. Not least the RBA.
The RBA suggested the research was “flawed” and “misleading” and it briefed the ABC and Guardian Australia in a (failed) attempt to discredit our work.
The RBA’s May 2023 Statement on Monetary Policy even contained a special section titled “Have Business Profits Contributed to Inflation?”
The RBA concluded:
There is little evidence that there has been a broad-based increase in domestic non-mining profit margins, suggesting that changes in domestic profit margins have not been a significant independent cause of the increase in aggregate CPI inflation.
In a separate briefing, the RBA suggested that Australia Institute research:
fails to account for the overwhelming influence of mining profits. If mining profits were properly accounted for in the analysis, returns to workers would not have fallen.
Despite this, Australia Institute research held up, especially once the IMF and OECD confirmed the soundness of its analysis soon after.
But now, 3 years later, the RBA itself has belatedly come to the party.
Quality research, analysis, explainers and factchecks from experts you can trust.
Last week, it published research titled “An Input-cost Decomposition of the Household Consumption Deflator”.
If that sounds a tad obscure, in layperson’s terms it is trying to work out what causes the rise in prices of things bought by households.
One criticism in 2022 and 2023 was that The Australia Institute looked at the causes of rising inflation using the “GDP deflator” instead of the Consumer Price Index (CPI).
The “household consumption deflator” is the closest thing to the CPI in the GDP figures, so arguably this would be a better analysis of the causes of inflation. In 2023, the RBA suggested such analysis would show how wrong we were.
Except … the result from this latest research actually confirms the Institute’s analysis of 3 years ago.
This latest work by RBA economist, Isobel McKay, found
Business owner returns [i.e. profits] and import prices contributed materially to growth in the household consumption deflator immediately following the COVID-19 pandemic.
That is – profits and import prices (themselves driven by increased profits) were the main drivers of inflation in 2022, which was when inflation rose from 3.5 to 7.9%.
And what about the impact of mining profits? Should we have ignored them?
Well, no.
A relatively large share of this contribution can be explained by the mining industry
Ahh well, better late than never, I guess.
Should we expect apologies from those business groups who in 2023 thought Australia Institute research was ‘blatantly flawed’ had ‘no credibility’ and was ‘anti-business rhetoric’? Perhaps the conservative economist who suggested The Australia Institute should “admit their mistake and retract their so-called analysis” might want to retract that?
Australia Institute not only survived criticism from some of the most powerful economic forces in the country, but it is also now supported by the one institution which was most stridently critical.
Greg Jericho is Chief Economist at the Australia Institute.
