Are big companies profiteering? Melbourne University researchers, Reserve Bank of Australia economist say no

While bumper company profits have been condemned by organisations like the Australian Council of Trade Unions as evidence of widespread price gouging, a study by Melbourne University researchers Chris Edmond and Monique Champion and Reserve Bank of Australia economist Jonathan Hambur has found there is no evidence to support the claims.

Professor Edmond said the rate at which company profits were growing had not changed since before the pandemic, and the big gains announced by the banks, supermarkets and others reflected the recent strength of demand across the economy.

The study's analysis of firm-level data also found no change in the extent to which companies were passing increased costs through to their customers.

The findings contradict assertions that company profiteering is driving up living costs and inflation.

The Australia Institute and the Centre for Future Work have claimed that "higher corporate profits ... account for most of the rise in economy-wide unit prices in Australia since the pandemic struck".

The organisations argue that a recent moderation in corporate profit growth has occurred "alongside a reduction in inflation". "This further confirms the close correlation between corporate profits and inflation."

The ACTU said bumper profits like those reported by the Commonwealth Bank ($10.2 billion), Woolworths ($900 million), insurer IAG ($832 million) and Origin Energy (more than $1 billion) showed that "corporate price gouging, and the associated record profits generated by it, were a far more potent driver of Australia's inflation crisis that modestly rising wages".

Economists at the International Monetary Fund reported that higher company profits accounted for almost half the increase in Europe's inflation, but they cautioned that "this is not the same as saying that profitability has increased".

The IMF researchers said that although firms had passed on higher input costs, "limited available data does not point to a widespread increase in markups".

Professor Edmund said that although company profits had increased, they had not grown disproportionately relative to the expansion of the economy.

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He said the profit rate had been growing gradually but consistently over many years, and its pace had not changed from the pre-COVID period when inflation was low, to the current high inflation environment.

One of the concerns has been that highly concentrated markets like banking, supermarkets and aviation allow incumbents to use their dominance to push up prices.

But Professor Edmund said his research showed the opposite was occurring.

He said firms that faced less competition passed less of their increased costs on to consumers than those in highly competitive environments.

This was because dominant firms were better placed to absorb some of the higher costs rather than risk pricing some customers out of the market, while companies facing stiff competition had less capacity to do this and were more likely to pass higher input costs through.

"Industries where pass through is high are the ones that are more concentrated and is low where there is more 'fat'," Professor Edmond said.

The economist said further data might cause he and his fellow authors to revise their findings, "but so far as we can tell right now, neither the raw micro data nor quantitative economic models give much reason to think that variable markups are amplifying inflation".