One of Australia’s leading competition experts, former Australian Competition and Consumer Commission (ACCC) boss Allan Fels, has lent his talents to a union-backed probe into price gouging that will seek to determine whether large firms are ripping off consumers.

The probe, announced this week by the Australian Council of Trade Unions (ACTU), will “analyse the connection between living standards and surging corporate profits”, the union said.

It comes amid raging debate about the role profits have played in worsening the cost-of-living crisis that has pitted many economists, the Reserve Bank and Treasury against 2021 research by progressive think tank the Australia Institute.

That paper suggested excessive corporate profits have made inflation worse in recent years, though the data underpinning the analysis has been hotly contested among economists.

Dr Fels’ analysis will add another chapter to the debate, with the ACTU referencing a “concerning imbalance” between rising profits and inadequate living standards.

“The inquiry will delve into the root causes of price gouging, identifying sectors most impacted and the mechanisms by which it affects consumers,” the ACTU stated.

“Additionally, it will analyse the connection between dwindling living standards and surging corporate profits, aiming to address the concerning imbalance.

“Ultimately, the inquiry aims to recommend practical and effective measures to curb price gouging and protect the financial interests of all Australians.”

‘Price gouging has real victims’

The ACTU inquiry into price gouging will hold hearings across the country before Dr Fels delivers a final report.

Social services advocates have welcomed the inquiry, with Australian Council of Social Service (ACOSS) chief Cassandra Goldie saying Dr Fels is “well qualified” for the job.

Dr Goldie said that while inflation had hurt many businesses, the burden of high inflation needed to be “fairly shared” and “not shifted to lower-paid workers and people on fixed incomes”.

She said that Australians on low incomes have had to suffer cuts and inadequate income support in recent years, with the “real possibility” of an impending economic downturn.

“Inflation has eaten into household budgets over the past year and has been used to justify aggressive interest rate hikes by the Reserve Bank, putting people’s jobs and living standards in jeopardy,” Dr Goldie said.

“Experts agree one of the causes of excessive inflation is businesses with market power being unwilling to reduce profit margins as inflation took hold and business costs rose.”

Writing about the inquiry in the AFR this week, Dr Fels said he didn’t intend the probe to be a “witch hunt”, but does think Australians deserve answers about the role price gouging has played in lifting prices.

“It will be a serious look at what is a serious problem,” Dr Fels wrote.

“During a cost-of-living crisis, price gouging has real victims. Those victims deserve a voice and a policy solution.”

Profits inflation debate

The role of rising profits in the most recent wave of inflation, however, has been the subject of an increasingly fractious debate among economists that has even drawn in RBA boss Philip Lowe.

Dr Lowe and Treasury officials have argued the link is tenuous at an economy-wide level, partly because much of the total profits made by firms flow from changes in global commodity prices.

When we look at the aggregate data, the share of national income that is going to profits, if we put aside the resources sector, really hasn’t changed,” he said.

“There are certainly some firms where profit margins are rising, but there are other firms where profit margins are under pressure.”

At least part of the debate is an apparent misunderstanding with unions vigorously opposed to suggestions that wages growth, rather than profits, has made inflation worse since COVID-19.

There is actually widespread agreement that wages growth has not driven inflation higher – including from the Reserve Bank and Treasury.

‘Increase in monopsony power’

But that’s also not the only way to look at the problem, either.

Assistant Minister for Competition Andrew Leigh has pointed out in recent speeches that a lack of competition has made it easier for companies to push profits up and subdue wages growth.

And this more nuanced debate appears to be the angle Dr Fels will predominantly focus on, with competition seen as playing a key role in the ability of companies to engage in price gouging.

“Over recent decades, Australia has seen a rise in market concentration and mark-ups, and an increase in monopsony power,” Dr Leigh said in July.

“Our biggest firms have more power to push prices up, and to keep wages down.”

In his opinion piece this week, Dr Fels also referenced recent comments from the RBA that suggested some businesses may have used inflation as an excuse to raise prices more than necessary.

“In June, even the RBA acknowledged that inflation might in part be caused by companies ‘indexing their prices, either implicitly or directly, to past inflation’,” Dr Fels wrote.

“In other words, companies could be exploiting the general inflationary episode to unfairly and unjustifiably increase prices beyond the level forced by inputs.

“This was a big admission from the RBA – and a very clear invitation to put pricing under scrutiny.”

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