On the Inflation in Australia

The world is experiencing high inflations except a few countries (Figure 1). Most G20 countries are in the war against inflation (Figure 2). In this article, we specifically look at the situation in Australia.

RBA is to be blamed for inflation, but not only.

The inflationary pressures facing Australia and the other G20 economies have been driven by a range of factors, including government policies, supply chain disruptions, war in Ukraine,  and global trade tensions. While the RBA has faced criticism for its handling of inflation, it is important to consider the broader context and underlying causes.

One of the main factors contributing to inflation in Australia has been the government’s response to the COVID-19 pandemic. The government and RBA’s decision to print money and provide stimulus payments to citizens has fuelled a surge in demand for goods and services (there was a lag), which has outstripped supply and driven up prices. While these measures were necessary to support the economy during the pandemic, they have had unintended consequences and contributed to the inflationary pressures facing Australia today. Looking back, it is fair to say that RBA has printed more money than needed.

In addition to these domestic factors, Australia has also been impacted by global supply chain disruptions and trade tensions with China. These disruptions have led to shortages of key goods and services, which have driven up prices, and made it more difficult for businesses to operate efficiently. Additionally, the government’s previous decision to shut down some factories like Ford and Holden has further contributed to inflationary pressures and limited the country’s production capacity.

Despite these challenges, the Australian economy has been recovering strongly from the pandemic, which has further fuelled demand and contributed to inflationary pressures.

Is the interest rate hiking necessary?

The decision to raise interest rates is a complex one, and depends on a range of economic factors. While high inflation rates are a concern, it is important to balance the need to control inflation with the need to maintain economic growth and employment.

In the case of Australia, a gradual increase in interest rates is necessary to address inflationary pressures. However, policymakers will need to carefully consider the potential impact of rate hikes on different sectors of the economy. It may be acceptable to see some increase in unemployment rates in the service sectors, which tend to be more sensitive to interest rate changes, but policymakers will need to be cautious about the impact on the production sectors, which are key drivers of economic growth and employment. Note that the increase in production level can help control inflation.

Will this RBA shake-up do much better to tame this inflation?

The recent shake-up at the RBA may help to address some of the concerns around inflation, but it is unlikely to make a significant difference on its own. To effectively address inflation, it will be important for the RBA to work closely with the government to implement a coordinated approach that combines both monetary and fiscal policy.

Monetary policy, which includes decisions around interest rates and the money supply, is typically managed by the RBA. However, fiscal policy, which includes government spending and taxation, can also have a significant impact on inflation. To effectively address inflationary pressures, it will be important for the RBA and government to work together to coordinate both monetary and fiscal policy measures.

The current RBA board has done the hard yards, it has played the “bad cop” role. The new board will inherit the legacy.

What needs to be done?

Taming inflation in Australia will require a multifaceted approach that balances both monetary and fiscal policy measures. While the RBA has already implemented interest rate hikes to curb inflation, there are several additional but more important measures that the government can take to support the economy and address inflationary pressures. Here are a few recommendations:

Firstly, the aggressive interest rate hikes together with the high inflation has caused some damage to the production sectors, it is important for the government to take swift action to support the production sectors, which have been particularly hard hit by the aggressive interest rate hikes and high inflation. This could include temporary measures such as subsidies and financial support to help businesses navigate this challenging period. This will help maintain the production level of the economy. For instance, the construction sector in Australia is currently facing challenges in maintaining a healthy operation, which is primarily due to the rising cost and decreased demand. This situation has resulted in an exacerbation of the housing crisis, making it increasingly difficult for Australians to access affordable housing.

To address this issue, the government could provide project-based subsidies to the construction industry. These subsidies would help reduce the operation costs and increase the demand for housing construction projects. Such measures would not only support the construction industry but also make a significant contribution towards resolving the current housing crisis in Australia.

Secondly, implement targeted tax increases on businesses that have benefited from government support during the pandemic, as well as those that are benefiting the most from inflation. This could help to reduce income inequality and support a more equitable distribution of wealth.

Thirdly, the government could improve the minimum centre link payment for the most vulnerable groups. This would help to support those who are most impacted by inflation and provide a safety net for those who are struggling to make ends meet.

In terms of raising the payment for the labour force, it is important to balance the need to support workers who are struggling with the potential impact on inflation and the wider economy. Any increases in wages should be carefully considered and implemented in a way that maintains the competitiveness of the businesses and that it does not stimulate the inflation further.

Fourthly, improving the trading relationship with manufacturing countries such as China could help to ensure that Australians have access to the goods and services they need.

Fifthly, tighten the lending criteria of the commercial banks. 

Finally, investing in and subsidizing the production sector to be prepared for deglobalisation could help to ensure that Australia is able to maintain a strong and resilient economy in the face of ongoing economic challenges.

By taking a coordinated and strategic approach that balances both monetary and fiscal policy measures, Australia can eventually address inflation and support long-term economic growth and stability. Before the productivity and production being improved to meet the increasing demand, Australians will have to accept a lower living standard and live with inflation.