Profiteering is driving inflation, says former ACCC head. And here’s the hard evidence

Profiteering has played a major role in inflation in Australia, Professor Allan Fels has argued in a report released today, in which the economist and former Australian Competition and Consumer Commission (ACCC) chair provides extensive evidence that Australian firms have exploited a lack of competition to push up prices over the past two years.

The report is the result of an inquiry commissioned by the Australian Council of Trade Unions and comes after an extended debate between progressive economists, the US Federal Reserve, the OECD, the IMF, the European Union and the European Central Bank (all of which have identified the significant role of profiteering in the post-pandemic inflation spike) and the Reserve Bank and conservative economists here (who insist profits have played no role in inflation and that it is the fault of wages growth and excess demand).

Fels’ report takes the central defence of those who reject profits as a cause of inflation — the overall level of profit in the economy — and turns it against them.

Corporate gross operating profits rose 45% between end-2019 and mid-2022. They stayed near those record highs in late 2022 and early 2023; they have partly moderated recently but remain high by historic standards … For 2022 as a whole, corporate profits equalled 28.7% of GDP — the highest for any calendar year on record. The growth of corporate profits vastly outstripped the expansion of real output after the pandemic; the spectacular rise in profits cannot be explained by increases in real output or sales for companies. Instead, it reflected a rapid run-up in nominal prices for each unit of output.

Fels rejects the argument peddled by the Reserve Bank that this is all because of mining and energy profits that have to be ignored because they mainly relate to exports:

Profits of aggregate non-mining sectors also grew disproportionately to their total revenue and value-added … even in 2022, non-mining corporate profits were about 1.5 percentage points higher as a share of non-mining GDP than in 2019 (before the pandemic).

Certain strategic sectors — manufacturing, wholesale trade, and transportation — have seen especially strong profit growth such that they are “now rivalling that of the mining sector”.

He also mocks the Reserve Bank’s argument that surging energy profits are unrelated to inflation — a claim that “will seem especially far-fetched to any consumers who have grappled with sky-high prices for petrol, gas, and electricity over the past challenging years”.

What have been the worst sectors? Aviation (probably the one industry where even profit denialists admit gouging has driven inflation), banking, child care, electricity (under the failed existing regulatory regime that allows gouging to occur) and food and groceries. All of those sectors are marked by high levels of concentration, which Fels argues must be addressed through substantial reforms to competition law — which allows price gouging if it doesn’t fall into specific categories of anti-competitive conduct — and more powers for the ACCC to investigate, name and shame, and prosecute price gougers.

In some very concentrated markets competitors are able to raise prices in parallel without having an unlawful price fixing agreement. Those prices can be high as or higher than a cartel may charge. Another example is pricing by a dominant or monopoly firm: this is not addressed by competition law. Despite the fact that the greatest concern of economists with monopoly or market power is harmful high prices, high and unfair prices are not prohibited by competition law. There has been an ideologically-driven resistance to competition law addressing this feature of monopoly behaviour in Australia and in North America.

Fels also wants a proper divestiture power added to competition law so that the ACCC could force dominant firms to be broken up.

One other suggestion Fels makes is one that neither governments nor incumbents in heavily concentrated industries would be comfortable with: he wants a “Commission on Competition and Prices to review government and other restrictions on competition and high prices caused by a lack of competition”. Governments themselves have a history of facilitating lack of competition — from major project infrastructure tendering to “critical infrastructure” laws that increase barriers to entry to protectionism for local industries (think anti-dumping).

Fels’ report contains a mountain of evidence for the role of profiteering in inflation. Over to the denialists to try to show why he’s wrong.

How much do you blame corporate profiteering for the current cost of living crisis? Let us know your thoughts by writing to letters@crikey.com.au. Please include your full name to be considered for publication. We reserve the right to edit for length and clarity.