Embrace the culture of inflation
Hogan says that for Australia to have an “inflation problem” wages have to start rising as it is the biggest cost to the economy.
But he told a Trans-Tasman Business Circle lunch on Monday that Australian businesses are not used to the idea of inflation and do not have the inflation mentality.
“In fact, for the past 15 years, companies have faced cyclical movements in the price of certain inputs by carrying them within their margins,” he said.
“It’s part of our modern low inflation environment. These are the companies where this risk, in a way, is from year to year, but everything diminishes over time. At a time when margins are dropping, roughly speaking, in absolute terms. “
Hogan says workers aren’t used to the idea of asking for higher wages.
“In fact, I think there’s a whole other psychological study into why people don’t ask for higher wages. But I think that is changing.
Hogan, who is a consultant for Judo Bank, said he has discussed with many business leaders how to push through the price increases and embrace what he calls the “culture of inflation.” .
“I think there’s a very good chance – and I don’t know if that will happen – but if you have enough people in business and enough people to ask for pay increases, inflation expectations change, which is actually a culture of inflation, “he says.
“It’s about saying, I have to ask for a 5 or 10 percent price increase or I have to ask for a 5 percent pay raise or – in fact something that we had probably been somewhat missing in Australia is – I’m ‘I’m going across the street for a 20 percent pay raise.
Chris Petzoldt, local managing partner at pricing consultancy Simon-Kucher and Partners, says Hogan is right when he says Australian companies have absorbed cost increases through margins.
But he says that’s not unreasonable, as a decade ago Australian companies had relatively high profit margins compared to their overseas competitors.
He says business people are afraid to raise prices “because they forgot how to do it”.
“Plus, the last time they tried to raise prices there was a backlash from the media and consumers,” he says.
“I think a lot of companies never make the effort to understand what is possible when it comes to price increases.
“Not all products have the same prices. Businesses need to understand what their customers need and what products and services appeal to different customers.
Joseph Healy, Managing Director of Judo Bank, says there is no doubt that at the far end of town “the emphasis is on reducing costs rather than growing revenues.”
He says it’s because many of our key industries are so heavily concentrated among the big players.
“There is no real pro-competition policy framework in the banking sector.
“The framework has really been with APRA [Australian Prudential Regulation Authority] and its financial stability. ACCC [Australian Competition and Consumer Commission] try to protect themselves against monopoly behavior, but there is no political framework to say that it is necessary to facilitate the entry of new entrants.
“There is a need for a policy framework here that really places competition as a key national political economic program and makes it attractive and encourages people to enter sectors that appear to be captured, dominated by a handful of players.”
If companies start to raise wages and raise prices, this will play a part in the agenda favored by the Reserve Bank of Australia, which sees inflation as the natural result of stronger economic growth.