We shouldn’t allow impatience to get the inflation rate back to target to worsen the risk we’ll end up in a recession.
Other central banks have started cutting interest rates, yet our Reserve Bank is declining to join them because, as governor Michele Bullock, it doesn’t expect our rate of inflation to fall back to the mid-point of its target range “in a reasonable timeframe”.
Why do their expectations matter? Because, many economists believe, when enough people expect inflation to stay high, they act on their expectations and so make them a reality. Workers and their unions demand higher wages, and businesses pass their higher costs on to customers in higher prices. In 2022, Dr John Bluedorn and colleagues at the International Monetary Fund conducted a study of the historical evidence for wage-price spirals in the developed economies, concluding that a jump in wage growth shouldn’t necessarily be seen as a sign that a wage-price spiral is taking hold.
In mid-2022, Borland listed three respects in which our present circumstances are different. First, upward pressure on wages is being limited on the supply side by employers’ ability to give extra hours of work to part-time workers who’d prefer more hours, and by drawing more participants into the jobs market.
There were four important respects in which the present rules are very different. First, the new “modern awards” operate as a minimum safety net and the circumstances in which minimum wages may be adjusted are limited. In effect, there is no scope to adjust minimum award rates to reflect the outcome of collective bargaining at the enterprise level.
Fourth, the sanctions against engaging in such industrial action are, Ross said, “readily accessible and effective”.
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