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Why is Australia stuck in an inflation problem that has sent interest rates to 15-year highs?
Mortgage borrowers are facing their fourth interest rate rise this year. Why is Australia stuck in an inflation problem that has sent interest rates to 15-year highs?
If you listened only to the opposition, some economic commentators and sections of the press, it's entirely down to government financial mismanagement at a federal and state level. If, instead, you choose to listen to the person most responsible for your mortgage rate, it's a bit of everything all at once.
"The bottom line is that there are a number of pressures all bearing down on inflation at the moment," RBA governor Michele Bullock told reporters following the meeting where the bank's board raised its benchmark rate to 4.6 per cent. The most serious energy supply shock in 50 years has collided with the biggest technology investment boom on record, pushing up the cost of imported fuel and tech equipment, at the same time as Australia was at the tail end of a housing boom and consumer spending spree.
Speaking specifically about the energy shock, Ms Bullock emphasised the role the lingering, and worsening, conflict has played in stoking inflation.
"The longer it goes, the more likely it is that businesses will just try to pass through the cost increases,""Now will they be able to? If they're in industries, for example, where there's excess demand, they might be able to pass it on.
" This is not the pandemic version of excess demand, where ultra-low rates and mammoth stimulus payments to households and businesses sent the economy hurtling down a supply-constrained, pothole-strewn back road at 100 kilometres an hour. This is the economic equivalent of not noticing the speed limit has changed and doing 60 in a roadwork zone.
In other words, the current "excess demand" isn't feeling very excess for most households, even though they're the ones being asked to pay the penalty.
"Growth in aggregate demand needs to remain subdued for a period to reduce capacity pressures and bring inflation back to target. " In plain English, we need you, mortgage borrowers, to enjoy a lower standard of living so that the economy has capacity to build lots of data centres and pay for more expensive fuel imports while inflation still comes down. "Inflation is just too much money chasing too little stuff.
"But no Reserve Bank, no government can wave a magic wand and make Australia produce more stuff overnight. "So the question becomes, who gets less money to spend? Who gets hit over the head? We have a system that uses interest rates to to basically hit borrowers over the head.
"Not entirely. While it has been keen to talk up the effect of the Middle East crisis, Michele Bullock said that was not the sole driver of Australia's inflation woes.
"This isn't all about the Middle East conflict," she told reporters. "It is making things much worse, but we did start from a position of excess demand anyway, and that's why we started raising interest rates even before the conflict started. "Her response is still well short of the critique launched by Opposition Leader Angus Taylor. "And we know that this is a government that is spending too much.
" Treasurer Jim Chalmers said he has been working hard to restrain government spending growth, but many economists argue it needs to fall. "I delivered the first surplus, in fact the first two surpluses, for a decade and a half," he fired back at reporters questioning his fiscal credentials. "Average real spending growth has been less than half our predecessors and less than it was before COVID.
" When you look at international comparisons, it's hard to argue that Australia has the second highest central bank interest rate among advanced economies because of extreme fiscal ill-discipline. As this OECD chart shows, when it comes to deficit spending, which is what matters for the net amount of demand the government is injecting into the economy, Australia is broadly around the middle of the pack, and a long way behind the budget train wreck that is the US.
If the government's deficit is part of the problem, Angus Taylor's solution of "axing Labor's toxic taxes" in the absence of concrete plans to slash government services or payments to make up for the lost revenue, and then some, and then some is hardly a fiscally responsible alternative. As Richardson noted in an AFR column earlier this year, despite the argy-bargy between Australia's politicians over modest tax rises here and spending restraint there, Canberra is fiddling while the nation's finances are in a slow burn.
"If inflation is too much money chasing too little stuff and governments give us extra money — and they did a lot of that, state and federal in recent years — they become part of the problem and make the Reserve Bank's life harder," Richardson observed. Yes, but the ball is firmly in the government's court.
When asked by The Australian's Matthew Cranston whether adjusting the super guarantee to take some money out of people's pay but leave it in their future retirement nest egg might be a more "nuanced" way to tackle inflation, Bullock declined to comment, saying, "That's not at all within our gift.
" Preliminary research undertaken by the progressive Centre for Policy Development think tank suggests that temporarily increasing the super guarantee by 0.5 per cent might take about $2 billion per quarter out of the economy, similar to the effect of a 0.25 percentage point rate hike. If government spending restraint is what you're after, another option would be to index administered prices to the mid-point of the RBA's target band, rather than the consumer price index.
The CPD's economists, led by Warwick Smith, found administered prices accounted for 7.2 per cent of the 26.8 per cent cumulative inflation between 2020-2026.
"This bakes cost-push shocks into statutory prices a year later, feeding a price spiral, inspiring extra wage claims and extending the duration of inflation episodes," they argued. Limiting those regulated price increases would be incredibly painful for the public and corporate operators in those industries as they would be unable to offset their input cost increases, but it would be an effective way to help short-circuit inflation.
The reality is, there is no painless way to lower inflation, especially when it's largely imported and overseas corporates and governments are the main profiteers "We get to pick our poison, but we can't avoid the fact that it is poison to bring inflation down," Richardson said. The difference is that we could force more people to take the poison rather than dosing up one particular section of the population so much it almost kills them.
Fixed Variable September November Inflation Consumer Price Index RBA Reserve Bank Of Australia Michele Bullock Budget Jim Chalmers Tim Wilson Government Spending
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