Gittins it wrong on inflation
Ross Gittins' recent column misunderstands basic economics, resulting in a confused narrative that oversimplifies inflation, misreads corporate profits, and misinterprets the relationship between industry concentration and competition.
The title of this post is a play on the name of the Sydney Morning Herald's long-standing economics editor, Ross Gittins (Gettin' and Gittins—close enough, right?). The reason I'm dedicating an entire post to him is because Gittins' Monday column was both a personal attack and so deeply confused that I felt it deserved the full treatment, so to speak.
Anyway, on to the column. Provocatively titled If there's no 'price gouging', how come interest rates are so high? – which should give you some clue as to what's going to follow – Gittins starts with the rather bold claim that the nation's economists have missed an obvious (to him) contradiction:
"[Y]ou can't argue that demand has been growing stronger than supply and so causing price increases, thus justifying using higher interest rates to slow down demand, and at the same time claim there's no evidence that profits have risen.
Sorry, guys. You can't have it both ways. If you claim there's been no noticeable rise in profits, you're contradicting the Reserve Bank's main justification for its 13 increases in the official interest rate since May 2022. (Which is funny, considering the Reserve has been prominent among those seeking to deny that profits have risen.)"
Gittins doesn't cite a single economist making these claims. Probably because if he did, the reader would very quickly find out that the economist was only discussing profits and prices at specific points in time, or for specific industries, not how it relates to a change in the price level (i.e. inflation). He's employing a rhetorical sleight of hand, using an appealing narrative of corporate greed with simple solutions (e.g. tax the buggers!) to explain away inflation and the need for higher interest rates.
It's a relatively basic error: mistaking relative prices for the price level. But Gittins' narrative tells us nothing about inflation, i.e. why the value of the currency has fallen, and continues to fall, relative to all goods and services.
Indeed, it only takes a relatively basic knowledge of economics to understand that when there's unexpected inflation, profits for some firms will rise. That's because firms always have a certain number of things purchased at lower prices, contracted for long periods, or borrowed before the inflation – e.g. inventories, wages, rents, loans – so there can be a temporary rise in profitability. It's not managerial skill, or price gouging, but simply good luck – when there's inflation, some firms' output prices will rise faster than their input prices.
But unexpected inflation always turns into expected inflation, input prices rise, workers demand higher wages, landlords ask for more rent, and interest rates increase. The rise in profits is always illusory, and while nominal profits may well remain elevated because the price level has risen, profitability for these lucky firms will fall back to what it was before the inflation – or even below, because our government looks only at accounting profits, so higher nominal profits means more taxation.