Do you feel like you’re paying more for everything, including food and banking? You’re correct. Even though we might be more inclined to recall rising prices than falling ones, the best available data, compiled by Australia’s Treasury, the chief economic advisor to the federal government, confirms your suspicions. We do indeed pay more now than we did twenty years ago.
In conjunction with the most recent earnings reports from Australia’s largest banks and supermarkets, such as Coles’ half-year results released recently, we are making a larger contribution to corporate profits than in the past.
Rising price markups
According to Treasury estimates, the average price markup, the discrepancy between a product’s cost and its selling price, rose 6% across all Australian industries during the 13 years between 2003–04 and 2016–17.
That’s extra money that the people selling you goods are taking from your wallet. The Productivity Commission chair Danielle Wood, former head of the Competition and Consumer Commission Rod Sims, and business mogul David Gonski have all contributed to the competition enquiry, and the background document they developed included those Treasury figures.
Meanwhile, the largest four companies’ average industry share increased little, from 41% to 43%. Additionally, profit margins here are larger than in overseas markets with greater competition.
This is evident in the banking industry, as the Big Four are on the verge of acquiring Suncorp after gaining control over St George, BankWest, and the Bank of Melbourne. It’s also true in supermarkets, where Woolworths and Coles, the two titans, have supplanted or eliminated Franklins, Bi-Lo, and Safeway.
Why are prices rising?
Grocery, energy, transit, child, and senior care prices have skyrocketed, adding to Australians’ cost of living. While unexpected weather and supply delays have contributed to the hikes, a probe into what’s causing them verified what analysts and consumers suspected: numerous businesses are utilising unethical price methods and misleading pricing.
On behalf of the ACTU (Australian Council of Trade Unions), former ACCC (Australian Competition and Consumer Commission) boss Allan Fels led the enquiry, which found inflation, questionable pricing practices, a lack of price transparency and regulations, market competition, supply chain issues, and unrestricted retailer price setting drove the increases.
One of four price-rise enquiries has delivered its final report. Two Senate committees, the Queensland government, and the ACCC, which the government has empowered, are handling the other three. Australian inflation peaked at 7.8% in December 2022 and has subsequently fallen.
Higher prices contributed to inflation, but businesses said inflation drove price rises, making it a chicken-or-egg conundrum. The study found that numerous businesses made huge profits in 2022-23, which raised prices and inflation. Most companies had increased profit margins after the COVID-19 pandemic.
Business pricing methods influenced product prices. Australian firms regularly misrepresented their prices. For instance, supermarkets raised prices before “discounting” things. These tactics raised prices and were “exploitative”, the enquiry determined.
A lack of comprehensive pricing information left consumers confused about price setting. The lack of competition exacerbated this. Market concentration was a big issue, however, the study found that Australian prices are much higher than in many less competitive countries.
Apart from starting an investigation and possibly granting Australian authorities the authority to dissolve companies that misuse their market dominance, there isn’t much the government can do regarding supermarkets.
However, Australian Prime Minister Anthony Albanese has stated that he is not in favour of granting Australian authorities the same authority as authorities in the United States and the United Kingdom, even though Australia is, (contrary to expectations) “not the old Soviet Union.”
And it would be unlikely to make much of an impact to accomplish anything less than that. The two largest grocery chains in Australia have made enormous investments in state-of-the-art facilities and distribution networks that will be difficult for new competitors to match.
Qantas, Australia’s largest and most prominent airline, has been accused of price gouging since the COVID-19 outbreak. The enquiry found that Qantas earned $1.7 billion in 2023, 208% more than in 2019. Moreover, the banking industry has long delayed passing on Reserve Bank cash rate cuts to consumers. However, banks instantly boosted their usual variable rates and passed them on to customers when the reserve upped cash rates. Bank profits increase with this strategy.
The probe study found that big banks’ average profit margins have increased since May 2022 compared to 15 years before. The four largest Australian banks’ profit margins were 35.5% in 2022-23, up from 32.4% in 2005–2020.
Australia’s lack of availability and difficulties in switching providers make it tougher for working parents to discover childcare alternatives. This means parents pay more if service providers boost costs.
From 2018 to 2022, childcare fees rose 20% to 32%, according to the probe. Thus, Australian households’ out-of-pocket childcare costs rose faster than wages. Non-profit childcare centres have lower margins than for-profit ones.
All Australian households have seen power price rises in recent years. The study concluded that wholesale and retail electricity pricing practices caused these price increases. In 2022-23, wholesale price hikes drove a 9%–20% increase in electricity costs. The audit said the “price bidding system” increased wholesale electricity rates.
Allegations of price gouging by supermarket chains have garnered the greatest attention. Cheese, bread, milk, eggs, dairy products, and morning cereals saw 19.2% to 27.3% price rises between March 2021 and September 2023, according to the probe.
Farmers recently accused stores of over-profiting from their produce. The enquiry agreed, finding retailers and food processors’ disproportionate market power concerns. Supermarkets raised prices when supplies were scarce or costs rose, but not when supplies were ample and prices were low.
Aiming for more aggressive lending
However, it’s quite different for banks. The brilliant concept came from Richard Denniss of the Australia Institute. The government should expand on the services it currently provides and offer a low-cost banking option.
Other banks might choose to add features and resell them in the same manner that resellers sell NBN and mobile phone services because the expenses would be so minimal. Any bank’s main purpose is to give Australians access to numbered accounts so they can deposit and withdraw money. At a very low cost, the Australian Tax Office already performs this.
Every employed Australian receives a tax file number from the tax authorities. Employers finance these accounts, and taxpayers take money out if the tax office is due a refund. Some taxpayers are careful to overpay their taxes to take a later withdrawal.
According to Denniss, it has the most awkward bank account interface ever. The government might be able to offer bank loans. Offering government financing wouldn’t be too far off from improving that interface.
Actually, in certain cases, the government already offers loans: for example, through the home equity access plan, which is available to retirees with home equity, and through advance payments made to Centrelink users. Offering loans more widely at a remarkably low administrative cost wouldn’t be all that difficult. Homes are already collateral for loans made by the government.
When the Commonwealth Bank was still a federal institution, it was responsible for paying for the substantial overhead associated with operating physical locations. Freed from those expenses, the government may now provide a basic banking service that is affordable and technology-enabled.
Although it may be costly, a significant portion of the funds has already been allocated to establishing the account and tax file number system. Naturally, the banks would strongly oppose this idea.
The government may need to consider regulatory measures to address market dominance and promote fair competition. Additionally, the idea of the government reentering the banking industry to provide a low-cost banking option is an intriguing suggestion that could potentially benefit consumers.
As consumers continue to face these challenges, it will be important for policymakers to carefully consider and address the factors contributing to higher prices and profit margins in different sectors for the overall well-being of the economy and its citizens.