Treasury says excessive corporate profits are not fuelling inflation, except in the mining sector.
Weighing in on a recent debate, the department sided with the Reserve Bank of Australia and agreed profits were not significantly driving up consumer prices.
Treasury official Sarah Hunter said the department had analysed how corporate profits had changed as inflation accelerated.
“And that’s where looking at mining versus the non-mining sector becomes important because the mining share has clearly lifted quite significantly,” Dr Hunter told a Senate committee hearing in Canberra on Tuesday.
She said high commodity prices had translated into higher profits for these companies.
“But if you take that out and look at the non-mining sector, the movements are much less pronounced,” Dr Hunter said.
But there was a lot of volatility and Treasury was “very cautious” about interpreting too much from the data from one quarter to the next.
Asked if mining sector profits played a role in household inflation, Dr Hunter said it did come through in some areas of the consumer price index basket, including petrol prices.
“But it’s a much smaller share of the CPI basket than it is of the whole economy,” she said.
Unions and think tank the Australia Institute maintain rising profit levels are contributing to high inflation rates and the influence of wage growth is overstated.
During the hearing, Treasury officials fielded back-to-back questions about inflation and its drivers.
Opposition senators were keen to get Treasury secretary Steven Kennedy’s view on the inflationary impact of the May budget.
Dr Kennedy said the overall effect of the budget would be to put downward pressure on inflation.
“In my view, as outlined recently in some public remarks, monetary policy is the primary tool through which we will manage these types of cycles outside of crises,” he said.
Economists have mixed views about the influence of the budget on consumer prices.
The Treasury secretary also flagged several concerning sources of inflation, including rents.
The top official at the department said the shift to smaller households, as adult children moved out of their parents’ homes, was contributing to housing demand alongside the return of migration.
Dr Kennedy also said approvals for new dwellings had fallen, which would translate into fewer housing starts.
New building approval figures released on Tuesday reveal an 8.1 per cent fall in April, with the annual pace of approvals down 24.1 per cent.
The fall was much weaker than the forecast two per cent uptick, and Commonwealth Bank economist Belinda Allen said the future of housing supply was now at “critically low levels”.
“The lack of new supply at a time when vacancy rates are low, household formation rates remain well below pre-pandemic levels and rapid population growth will mean rents, and home prices, will continue to face upward pressure,” she said.
Approvals for new detached housing fell by 3.6 per cent in April, and multi-unit approvals fell by 16.9 per cent.
Treasury officials also shed some light into a review of the Productivity Commission that’s under way.
The government has not called for a formal review but asked Treasury for ideas about how to modernise the institution.
Poppy Johnston
(Australian Associated Press)
