The news last week that inflation had fallen in the United States – such that it is now perfectly in the middle of the 2-3 percent target range the Reserve Bank of Australia would like our inflation figure to be – is proof positive that making tough decisions eventually pays off.
It is the reason this week US interest rates are also now expected to fall.
That’s not something we are likely to see here in Australia before the next election, no matter how hard the Treasurer tries to twist the arm of the RBA Governor Michele Bullock.
Why? Because our inflation figure is well above the RBA’s target range, and it is showing few signs of falling significantly enough to force rates down, therefore taking pressure off households doing it tough.
That’s the case no matter how loud former Treasurer Wayne Swan whinges about why the RBA needs to cut rates before inflation is back under control. He’s just cheerleading for his former political staffer and now Treasurer, Jim Chalmers.
US interest rates are actually higher than ours, because when inflation was too high over there its central bank did the right thing to ensure it didn’t embed high inflation.
By putting rates up more sharply than we did.
Embedded high inflation is exactly what has happened here, partly because our rates should have moved further north than they did in the first place.
Treasurer Jim Chalmers (pictured) isn’t prepared to make the sort of hard economic decisions that would help bring inflation and rates down
Once under the Morrison government, which was during the 2022 election campaign, and a dozen times since Labor was elected.
But inflation is also too high because government spending is now only adding to inflationary pressures, making it even harder for the RBA to cut rates than otherwise would have been the case.
We saw the RBA’s conundrum on vivid display when the latest national accounts were released, revealing that Australian government spending is growing at seven times the pace the economy is growing.
Ponder how unsustainable that is.
No responsible Governor of the RBA can recommend cutting rates in a climate like that when unemployment also remains low. Much less when also being all but bullied into doing so by the current Treasurer’s old boss.
Which is why it was irresponsible for Chalmers to also take aim at the RBA, saying that it was responsible for ‘smashing’ the economy. Claiming that higher than ideal rates was what has done the damage.
Those rates aren’t even at the levels of like-for-like nations such as the US, and lo and behold as a consequence our inflation isn’t coming down the way America’s is either.
There is no painless way to get out of a high inflationary period.
Reserve Bank Governor Michele Bullock so far isn’t bowing to political pressure to drop rates while inflation remains too high
Governments essentially have two fairly binary choices, if they don’t simply close their eyes and hope for the best:
1/ Deal with the problem head on by using rates to kill off high inflation, accepting the short term pain attached to doing so.
Or,
2/ Pretend like you can painlessly massage your way out of the high inflation crisis by not doing enough to treat the symptoms of the problem – even worsening it with government handouts and spending that fuel inflation – such that in the short term there is less pain but it persists for much longer.
Whether it is a lack of economic credentials and training (Jim and his finance team have none) or misguided ideological dogma (they seem to have that in spades), Labor has opted for the latter course of inflicting longer term pain on voters that isn’t too acute.
Which is precisely why Australia still has an inflation problem other parts of the world no longer do.
While the timing of the next election might not suit Labor – Albo and his team would prefer rates to be coming down ahead of the campaign rather than remaining stubbornly high – the timing is actually worse for the rest of us.
That’s because an election campaign in the current tight political climate is inevitably going to see our politicians try and buy votes with big spending plans.
Which in turn will put more upward pressure on inflation, making the task of reducing it back to within the RBA’s 2-3 percent band even harder to achieve in the election’s aftermath.
Labor is certainly sending such signals, and while the Coalition is talking tough fiscally the odds are once the campaign starts it can’t help but try and come close to matching (if not exceeding) Labor’s spend-a-thon in its own bid for votes.
Treasurer Jim Chalmers (pictured) is trying to point the blame for tough economic times at the Reserve Bank
So where does all of this leave us?
In only one place, unfortunately: no matter who wins the next election Australia’s slow painful economic circumstances are likely to persist.
And with the opinion polls suggesting a hung parliament is in the offing, the role of the Greens in the policy making process is going to increase rather than decrease.
Every Australian knows full well that the Greens recommend much higher spending than either major party ever does. Also suggesting higher taxes, which risk further stifling an already anemic economy.
To negotiate and secure Greens support in minority government, the successful major party to do so will need to pledge further spending beyond what it committed to during the campaign.
All of which is why high inflation is likely here to stay, unless the economy really collapses.
