It is not illegal for businesses to raise prices far above inflation, but increased competition and a super profits tax can help stop opportunistic profiteering by banks, supermarkets and energy companies during a cost-of-living crisis, economists say.

Companies raised prices 160 per cent above the cost of labour, taxes and inputs, and over and above new profits in the fourth quarter of 2022, the Australia Institute’s research revealed.

Matt Grudnoff, senior economist at the Australia Institute, told The New Daily that supply issues caused by the COVID-19 pandemic and Russia’s invasion of Ukraine initially led to higher inflation, but businesses continued to raise prices beyond their increased costs.

“Consumers were primed to accept that prices were going to go up and I think they took advantage of that,” he said.

“They didn’t really catch onto this until later, when we started to see large increases in profits.”

According to the Australian Competition and Consumer Commission (ACCC), prices people think are too high, colloquially known as price gouging, or a sudden increase in prices aren’t illegal, but businesses must not mislead consumers about what they’ll be charged and must set prices independent of competitors.

An effective solution

Mr Grudnoff said an effective solution to minimising price gouging is increased competition within the domestic market, which “has fallen away over the past few decades”.

“You think of grocery shopping, you’ve got the large banks, the big four insurance companies, whatever it happens to be, they’re dominated by large firms,” he said.

“We need to break up large firms, we need to stop large firms from merging and we need to basically create more competition in the market.”

Most Australian industries are dominated by a small number of companies. Photo: TND

Challenges of price control

Andrew Terry, professor of business regulation at the University of Sydney, said Australia has generally stayed away from implementing legislative intervention.

“Like just about every other country in the world, we’ve put our faith in competition as this effective regulatory force to improve services, encourage innovation and to lead to lower prices,” he said.

“Now the market isn’t perfect of course and we’ve got a very busy ACCC, enforcing comprehensive competition and consumer laws.”

Price gouging influencing inflation isn’t a new issue, and Australians even voted against giving the Commonwealth direct legislative powers over prices in a 1973 referendum.

Professor Terry said while the practice of raising prices suddenly and substantially may constitute unconscionable conduct in certain situations under Australian consumer law, “there hasn’t been any litigated cases on that, but there’s been a lot of media releases”.

“Pricing controls are a difficult, dangerous and very slippery slope that would seem to offer an easy and convenient solution,” Professor Terry said.

“They don’t offer a solution, in my opinion.”

The Australian Council of Trade Unions recently launched an inquiry into price gouging in Australia, and ACTU Secretary Joseph Mitchell said everyone has seen prices at the supermarket and bills rise over the past year.

“While some businesses may simply be copping rising costs too, there may be others using the cost-of-living crisis as a smokescreen to increase their margins and their profits,” he said.

“This inquiry will take submissions from everyday Australians who are just trying to get by and are scratching their heads at why everything [is] going up so much and companies who might be being squeezed by big business as part of a supply chain.”

Windfall taxes

The Commonwealth Bank recently announced record profits of over $10 billion, shortly after the Italian government introduced a windfall tax on its own bank’s record profits because of high interest rates.

Telstra also announced strong profits this week, months after increasing the prices of its mobile phone plans. Coles and Woolworths also aren’t struggling, despite shoppers paying a lot more for their groceries in recent times.

Commonwealth Bank posted record profits of over $10 billion.

Mr Grudnoff said companies posting huge profits ultimately affects consumers, in particular those struggling the most.

“A profits tax is very possible in the current political climate as far as economics goes, because they don’t change a firm’s behaviour,” he said.

“Often economists are worried if you tax something more, you’ll discourage people from creating and discourage people from buying, but a super profits tax just takes a big amount off the top.”

The federal government has recently introduced price caps on the wholesale gas price, after accusations of price gouging and profiteering were made against the industry.

Professor Terry said there are political and constitutional challenges when attempting to regulate pricing and stop opportunistic businesses from profiting during shortages and crisis.

“We have this complex constitutional system where power is divided between states and territories, but Parliament does have the power to do this,” he said.

“Parliaments of every persuasion have decided long ago that the better solution to the problem isn’t returning to price controls, it’s much more a strategy based on inquiries, monitoring and publicity.”