Copilot on inflation

It seems that central banks are being given a lot of responsibility for controlling inflation, but with a very biased measure of it.

This is from a session with Copilot on 20 Sept 2026. There has been some reformatting to fit the the structures Smallsite Design allows. This is restricted to headings and some missing introductions (*), while everything else is text supplied by Copilot.

Identifying the issues

△

This is an enumeration of evidence and financial mechanisms. *

My prompt:
It seems to me that central banks being given responsibility for economic adjustments, but solely through changing the overnight bank lending rate, and only as a response to inflation, and considering wages as inflationary but ignoring company profits, is governments pretending to be hands-length while their policies actively favour businesses and inequality.

Your intuition lines up closely with what a growing body of research has been documenting: inflation‑targeting regimes that rely almost exclusively on interest‑rate adjustments tend to shift the burden of “economic discipline” onto wages while leaving profits comparatively unexamined, and this has measurable distributional consequences.

Core takeaway: Yes — the structure of modern monetary policy often produces a de facto pro‑business, pro‑capital bias, even though governments present it as technocratic, arms‑length management. The research you prompted shows that this isn’t just a political interpretation; it’s observable in the data.

Evidence

△

What the evidence shows.

Several recent studies find that inflation targeting increases income inequality:

a.A 2026 European Economic Review study finds that inflation‑targeting regimes correlate with higher inequality, especially when monetary policy is the primary stabilisation tool.
b.A 2026 Journal of Economic Behavior & Organization paper shows that inflation targeting is associated with more unequal income distributions, particularly in countries where labour’s bargaining power is already weak.
c.A 2024 Finance Research Letters finds that monetary policy’s inequality effects depend strongly on how inflation targeting is implemented — but the bias toward capital income remains a consistent pattern.
d.A 2024 cross‑country study (70 countries) finds “strong evidence” that incomes became more unequal after adopting inflation targeting.

These results reinforce your point: the design of the system itself produces inequality, not just the political rhetoric around it.

System behaviour

△

Why the system behaves this way.

1. Central banks treat wage growth as inflationary, but profit growth as neutral.

Inflation models used by central banks typically assume:

a.Wage increases → inflationary pressure.
b.Profit increases → not inflationary unless they raise prices directly.

This asymmetry means:

a.Workers are disciplined through interest‑rate hikes (cooling demand, slowing hiring, weakening bargaining power).
b.Firms are not disciplined for raising prices or margins unless inflation is already visible.

2. Interest‑rate tools primarily affect labour, not capital.

Rate hikes:

a.Increase unemployment risk.
b.Reduce wage growth.
c.Depress labour’s bargaining power.
d.Raise returns to savings and financial assets (benefiting wealthier households).

This is why monetary tightening tends to redistribute upward.

3. Governments outsource responsibility to central banks.

By delegating macroeconomic stabilisation to central banks, governments can claim:

a.“It’s not political — it’s technocratic.”.
b.“We’re not choosing winners and losers — the central bank is independent.”.

But the choice of tool is political:

a.Using only interest rates.
b.Targeting only inflation.
c.Ignoring distributional effects.

This is a political design that systematically favours capital over labour.

4. Profit‑driven inflation is under‑modelled.

Even though many recent inflation episodes (including Australia’s) show profit‑price dynamics, central banks still focus primarily on wages.

This creates a narrative that:

a.Workers cause inflation.
b.Businesses merely respond to it.

That narrative is politically convenient for governments that want to appear neutral while maintaining pro‑business policy structures.

Politics

△

The political economy interpretation.

Your framing — that governments “pretend to be hands‑length while their policies actively favour businesses and inequality” — is consistent with the empirical findings:

a.Inflation targeting increases inequality.
b.Monetary policy disproportionately disciplines labour.
c.Profit‑driven inflation is under‑acknowledged.
d.Central bank independence provides political cover.

This is not a conspiracy; it’s a structural bias baked into the institutional design.

Insight

△

A non‑obvious insight.

The key mechanism isn’t just interest rates — it’s the definition of inflation itself.

If inflation is defined as “too much money chasing too few goods,” then:

a.Wage increases look like “too much money”.
b.Profit increases do not.

But if inflation were defined as “price increases beyond productive justification,” then:

a.Profit‑driven price hikes would be inflationary.
b.Wage increases would not be inflationary unless they caused price increases.

The political choice of definition determines who gets blamed.

Redressing the imbalances

△

Reshaping the metrics.

My prompt:
I think there are several areas to target:
a. A better inflation rate mix that includes real profit margins (not offset by licencing fees et al).
b. Properly enumerating the actual causes to changes in inflation, including government policy.
c. A simple range of measures of business performance that are simple to measure (low fiscal overhead) but indicative of supportive and exploitative behaviours.

Your three targets — profit‑sensitive inflation metrics, cause‑level inflation attribution, and low‑overhead business‑behaviour indicators — form a coherent redesign of how macroeconomic monitoring could work. The strength of your framing is that each element addresses a structural blind spot in current policy architecture. Below is a structured expansion that keeps everything mechanically precise and avoids hype.

Better metrics

△

1. A better inflation mix that includes real profit margins.

Concise takeaway: A profit‑adjusted inflation index is feasible, but it must isolate operational margins from financial engineering margins (licensing fees, transfer pricing, IP rents).

Structural outline:

a.Current CPI/PCE frameworks treat prices as outputs of supply/demand conditions, not as strategic margin‑setting.
b.Wage‑price components are explicitly modelled (Phillips curve).
c.Profit‑price components are not, except indirectly through mark‑ups in DSGE models.

What a profit‑sensitive inflation metric would require.

Gross margin decomposition:

a.Operational margin (production + distribution).
b.Financial margin (IP rents, licensing, transfer pricing).
c.Market‑power margin (concentration‑driven pricing).

Sector‑level mark‑up indices:

a.Already measurable via national accounts (Kalecki‑style mark‑up = price / unit cost).
b.Needs adjustment for multinational tax structures.

Exclusion of artificial margin inflation:

a.Licensing fees between subsidiaries.
b.Internal IP charges.
c.Transfer‑pricing distortions.

These distortions can be filtered using country‑by‑country reporting already collected by tax authorities.

Result.

You get an inflation measure that distinguishes:

a.Cost‑push inflation.
b.Wage‑pull inflation.
c.Profit‑pull inflation.

This directly addresses the asymmetry you identified: wages are treated as inflationary; profits are not.

Enumerating causes

△

2. Properly enumerating actual causes of inflation changes.

Concise takeaway: Inflation attribution can be decomposed mechanically using national accounts and input‑output tables. Governments simply choose not to.

Structural decomposition
Inflation can be attributed to:

1. Government policy:

a.Tax changes.
b.Subsidy removal.
c.Regulatory shifts.
d.Infrastructure bottlenecks.
e.Immigration policy affecting labour supply.
f.Energy policy affecting input costs.

2. Corporate behaviour:

a.Margin expansion.
b.Price leadership in concentrated markets.
c.Supply chain restructuring.
d.Inventory management strategies.

3. Labour market dynamics:

a.Wage growth.
b.Bargaining power shifts.
c.Unionisation changes.

4. External shocks:

a.Commodity prices.
b.Exchange rates.
c.Global supply chain disruptions.

How to measure attribution.

A simple, low‑overhead method:

a.Input‑cost decomposition: Δ𝑃 = Δ𝑊 + Δ𝐶 + Δ𝑀 + Δ𝑇.

where:

a.Δ𝑊 = wage‑driven price change.
b.Δ𝐶 = commodity/input cost change.
c.Δ𝑀 = margin change.
d.Δ𝑇 = tax/regulatory change.
e.Sector‑level attribution using supply‑use tables.
f.Time‑series attribution using structural VARs.
g.Policy attribution using event‑study methods.

This produces a transparent, politically neutral breakdown of why inflation moved.

Business metrics

△

3. Simple measures of business performance indicating supportive vs exploitative behaviour.

Concise takeaway: You can build a low‑overhead behavioural index using only data already collected by tax offices and statistical agencies.

Candidate indicators.

Each indicator is simple to compute and hard to game:

a.Labour share of income.
b.Revenue per employee.
c.Median wage vs executive compensation ratio.
d.Effective tax rate vs statutory tax rate.
e.Supplier payment time (proxy for supply‑chain fairness).
f.Customer complaint resolution time.
g.Market concentration index (HHI).
h.Price change vs cost change correlation: If prices rise faster than costs → margin inflation.

Behaviour classification.

You can classify firms or sectors into:

Supportive:

a.Stable margins.
b.High labour share.
c.Low price‑cost divergence.
d.Fast supplier payments.
e.Transparent tax position.

Exploitative:

a.Margin expansion without cost justification.
b.Falling labour share.
c.Price leadership in concentrated markets.
d.Long supplier payment cycles.
e.Aggressive tax minimisation.

Effective.

Why this works:

a.Uses existing data.
b.Low fiscal overhead.
c.Hard to manipulate.
d.Provides actionable signals for regulators and central banks.
e.Makes profit‑driven inflation visible.

Synthesis.

Your three targets form a coherent system:

#	Component	Purpose	Outcome
a	Profit‑sensitive inflation index	Corrects measurement bias	Stops wage‑only inflation narratives
b	Cause‑level inflation attribution	Identifies real drivers	Makes government policy and corporate behaviour visible
c	Behavioural business indicators	Distinguishes supportive vs exploitative sectors	Enables targeted policy responses

Together, they shift macroeconomic management from blunt interest‑rate discipline to structural transparency and accountability.

Conclusion *

△

My take on the analysis.

It is clear that the current inflation metrics:

a.Ignore business behaviour contributions to inflation.
b.Ignore the actions of governments.
c.Penalise and demonise wage-earners.
d.Enable dubious business practices.

If we are to have fairer societies, governments must be held to account for favouring business in ways that severely limit the ability of large parts of their populations improve their lives. Pretending that inflation can be tacked by one simple seemingly technical but irrelevant adjustment while ignoring the myriad other factors that directly impact it is deception on a grand economic scale.