RBA Analysis Decodes the Complex Link Between Corporate Margins and Inflation

The intricate relationship between profit margins, mark-ups, and inflation within the Australian economy is highly complex, challenging simplistic public narratives that directly link corporate pricing to broader consumer price pressures. An analysis of these dynamics, completed by Kate Davis, Jonathan Hambur, Kevin Lane, Dominic Megow, Sally Rafter, and Hamish Sullivan and released on 28 May 2026, reveals that the connection between profit margins and inflation is intricate, depending heavily on the specific underlying drivers of margin changes. Straightforward explanations that attribute inflation solely to rising profit margins do not fully capture the economic complexities that businesses and consumers navigate.

Profit margins can increase or decrease due to a diverse range of factors, including fluctuations in aggregate demand, changes in production and operating costs, or evolving competitive landscapes. Rather than being a primary driver of inflation, changes in margins are often a symptom of these broader economic forces working through the supply chain.

The Reserve Bank of Australia released a detailed study exploring these interactions. The findings show that while public debate often focuses on corporate mark-ups during periods of high inflation, the actual transmission mechanism between cost increases and retail price adjustments is highly variable across different sectors and timeframes.

Margin Pressures in Early 2025

During the first half of the analysis period, which focused on early 2025, distinct sectoral patterns emerged. In early 2025, various economic indicators pointed to a clear decrease in profit margins for certain businesses. This compression was most visible within the retail and residential construction sectors.

In these industries, input costs were observed to rise more rapidly than final consumer prices. Retailers faced escalating wholesale and logistics expenses, while residential builders struggled with high material costs. Because these businesses were unable or unwilling to pass the entirety of these cost increases immediately onto consumers—often due to concerns over demand destruction or fixed-price contracts—their profit margins contracted significantly.

This margin compression acted as a temporary buffer for consumers, absorbing some of the immediate shock of rising import and wholesale costs. However, such a trend is rarely sustainable over the long term, as businesses eventually seek to restore their baseline profitability once economic conditions stabilise.

The Shifting Dynamics of Late 2025

The economic landscape altered during the second half of 2025. Data from this period indicated a distinct reduction in the downward pressure on business margins. Crucially, this stabilisation and recovery of margins coincided with an acceleration in inflation across the wider economy.

This easing of downward margin pressure was not solely a result of businesses aggressively raising their prices. Instead, it was partly driven by a decrease in retail discounting, which followed a modest resurgence in consumer demand. Additionally, many firms focused on structural adjustments, implementing measures to improve productivity or cut operating costs internally rather than relying on price increases to restore their profitability.