The 3 reasons inflation is rising and what you can do about it

Inflation is surging but 3 industry experts point out that it is not due to higher wages or demand from consumers.

It's no secret that the cost of living is rising.

But despite industry experts warning that wage growth is having an impact on inflation, a leading think tank suggests wages are having no impact on inflation.

Instead a combination of factors, mostly on the supply side, continue to see the cost of inflation increase.

"Australia isn't experiencing a wage-price spiral, it's at the beginning of a price-profit spiral," Richard Denniss, chief economist at the Australia Institute, said.

So what is driving inflation today?

A governor who over-stimulated the economy

During a keynote address at The Australian Strategic Business Forum in Melbourne on Wednesday morning RBA governor Philip Lowe stated that support during the pandemic, including dropping the official cash rate to record lows, was having an impact on inflation today.

"This policy support meant that, as the health situation improved, households had the confidence and the ability to spend," the Lowe said.

"The result has been strong growth in aggregate demand and the emergence of tight labour markets in many countries. This has contributed to the higher inflation we are now seeing."

Although he points out this is in part due to experts predictions about COVID's impact on the economy.

"Looking at this experience with hindsight, I can understand why some people might conclude that too much support was provided by governments and central banks. But it is important to remember the context in which this support was provided," he said.

He also points to the Russian invasion of Ukraine and COVID eradication policies around the world which are having an impact on supply chains, which remain a challenge not only for Australia, but economies around the world.

"This has directly affected CPI inflation in all countries and there are now also second-round effects as higher energy costs feed into higher costs of transport and production," he said.

Corporate profits are on the rise

Figures released by think tank, the Australia Institute, said corporate profits are a major cause of rising inflation.

According to the report wage growth had "no contribution" to inflation in the 2019–2020 and 2020–2021 financial year.

Fast-forward to today and it is contributing just 0.6% of the current increases in prices we all face.

"The national accounts show it is rising profits, not rising costs, that are driving Australia's inflation," Denniss said.

The report highlights that wages growth was at a record low, but the same thing could not be said about company profits which as a share of GDP was near a record high.

"Given that profits currently account for a record share of GDP there is simply no truth behind the assertion that the Australian corporate sector has 'no choice' but to pass on cost increases in full in the form of higher prices," the report stated.

The study uses methodology similar to a European Central Banks analysis, which uses a GDP deflator on all costs that impact GDP including commodities. As such it says it can determine the role of profits and wages in the headline inflation figures.

Although not all economists agree.

And a weak Australian dollar isn't helping

While it is certainly not the only factor when it comes to rising inflation, a weak Aussie dollar is seeing imports cost more.

As such, businesses are passing on these costs to consumers, meaning the price of foreign goods continue to rise.

CB3 Global Payments' founder and managing director Chris Broadfoot told Finder that a weak Australian dollar is having an impact on our imports.

"Rates have gone from 72 cents in June (compared with the US dollar) to 67/68 cents in the last few days which is obviously really bad for importers".

Broadfoot explains shipping costs are in US dollars, meaning importing goods is rising sharply.

"Those costs are unfortunately going to be passed onto the consumer," he said.

What can you do about it?

1. Check your energy provider and compare with others
2. Ask your boss for a pay rise to match inflation
3. Check if your rates are going up (mortgage + savings) – check out competitors
4. For the risk takers – investments that do well in high inflation environment including financials, communications, health care, energy and businesses with pricing power

For more ways to offset the rising cost of living see our 50 easy and practical money-saving tips.