Inflation in the United States just hit 5.4%. Guys, that’s a lot. As this graph shows, the US inflation rate is the highest it has been in 11 years.
Does 5.4% inflation sound high? It is. It means you would need to earn 5.4% interest on any money you have in the bank just to break even. Because as prices rise, the spending power of money falls. If a 5.4% rate of inflation was maintained, prices would double every 15 years. (e.g. a $5 box of cornflakes would cost $10 by 2036).
Inflation is generally seen as bad news for savers. Your nest egg can buy only half as much stuff if inflation doubles prices. And after all, buying stuff is what nest eggs are for. For people with debt — and that’s lots of us — inflation can be helpful, as it eventually makes the debt seem smaller. But it’s important to take into account interest rates.
The rate conundrum
The most important effect of high inflation for Aussies might be that it causes higher interest rates. The Reserve Bank of Australia (RBA) uses interest rates to control inflation. (Inflation is like the heat given off by the economic engine, and low interest rates are an accelerator. If the engine gets too hot, the RBA takes its foot off the pedal by raising rates.)
For Aussies with a stake in our $1.9 trillion in mortgage debt, the big effect of higher interest rates would be higher mortgage repayments.
Is Australia at risk?
There are two big things you’ll hear about this rise in inflation.
The first is: don’t worry, it’s just a blip. It only looks high because last year inflation was low — annual inflation is measured by comparing this year with the same time last year. And yes, it’s true, this time last year US inflation was around zero.
The second thing you’ll hear is this: time to panic, this is the return of sky-high inflation.
That may be an exaggeration. But there’s a grain of truth in it, too.
The policies that governments around the world have engaged in — low, low interest rates and high, high spending — are the exact ones that have historically caused inflation. Of course, they also cushioned the economy from the effects of the pandemic. The reason Australia has unemployment at the same level as it was pre-pandemic (and underemployment lower than it was pre-pandemic) is because these policies did a lot of good work.
So, will those useful policies unleash a wave of inflation that will torment us over the next few years? It’s worth remembering that inflation in Australia used to be more than 15% (and interest rates were even higher). We haven’t seen high inflation for a long time, but it’s not completely out of the question. Supply shortages and shipping congestion are pushing up prices for a lot of imported goods.
A massive policy question for the nation to confront is whether the RBA should let inflation run a bit hot, or whether it should step in. In the past, the RBA has always focused on keeping inflation down — that’s why the red line in the graph above has been falling for the last 20 years. But recently it has been more focused on the labour market and worrying about unemployment. If it stamps out inflation, it also tends to stamp out jobs growth and wages growth.
This time, the RBA has suggested, it will let inflation get a little bit higher than usual before it acts. It will put up with inflation numbers of 3% for a while, if it helps get unemployment down to about 4% and wages growth up to about 3%.
Is inflation worth enduring if it gives us better employment outcomes? It’s a tough trade off. What must also be remembered is how rapidly Australian politics can pivot to being about cost of living, at the exclusion of just about everything else.
If we ever notch up an inflation result like the US’s 5.4%, expect the political discourse to focus in on it like a dog on a bone. Albo and ScoMo would talk cost-of-living non-stop. And that’s bad news for anyone who’d like politics to aim a bit higher.
What do you think? Should the RBA leave inflation high for a while, or work at getting it down now? Send your thoughts to letters@crikey.com.au, and don’t forget to include your full name if you’d like to be considered for publication.
Like the majority of numbers referenced by Governments, CPI is fiddled to get the result they want. CPI, unemployment, emission reductions, hotel quarantine effectiveness… any published statistical number you can think of has been fiddled to meet the requirements of the ruling Gov at the time. Whatever story they want told is the number revealed.
You need to look outside the “official” figures & delve deeper into independant (verified) research to find the real story. Do your own fact check & verify-verify-verify. Healthy disbelief is a good starting point.
As NSW plunges back into lockdown, the banks have been warned to prepare for negative interest rates. Meanwhile, the Reserve Bank has quietly conceded the banks have not lent the $188 billion pandemic stimulus, parking it in their $314b war-chest at the central bank earning no interest….Michael West.
Bloody glad all that money was spent on the Coalition’s fake RC into Banks.
“Is inflation worth enduring if it gives us better employment outcomes? It’s a tough trade off.”
If you are unemployed or underemployed its not a tough trade off.
That’s 1.8 million Australians and their families.
Unemployment affects real people and the quality of their life.
As a moral question, if we are to accept the inflation/unemployment trade off, then we shouldn’t be subjecting the unemployed to controlling and oppressive measures such as work for the dole, income management and work tests.
Bullshit and fear-mongering, low inflation or stagnation is the problem, give me the choice of financial advice from a financial expert and a monkey and I`ll take the chimp not the chump any day..
If they were any good they’d be making a motza for themselves instead of clipping the tickets of those who did do well in the real world.
We should NOT accept the unemployment-inflation trade off (ie, the NAIRU dogma of neoliberalism, see the Job Guarantee of MMT).
And with climate change breathing down our necks, the orthodoxy of an economy based on consumption needs to change to one based on knowledge, and how to replace unnecessary consumption with creative engaging activity.
The entire alcohol, sugary beverage, junk/processed food, and meat production industries have to go, to be replaced by R&D into circular economies, sustainable local healthy food production and distribution, green energy systems, production of sufficient clean housing, and green public transport, all funded by authorizing central banks to create and spend the money on these activities.
Guess what…the free market as the determinant of productive activity must be consigned to the dust-bin of history, we have more creative activities with which to engage ourselves (including employment in the people and environmental care industries).
We can start by taking literally a report by the BIS: ie, “central banks might have to buy the fossil industry” (with these banks’ unlimited currency-issuing capacity); rather than blaming China for not doing enough which will undoubtedly be the US approach in the upcoming Glasgow meeting on climate change.
Of course poor Greta Thunberg’s calls for action – along with Green political parties – will continue to fall on deaf ears as wealthy fossil companies would rather see the planet die than lose their lucrative income streams, in the absence of full compensation for enforced closure of their industry – compensation which only central banks could possibly fund (likely to be of the order of a cool $100 trillion globally).
Orthodox economists bear much of the blame, they refuse to countenance allowing central banks to “print money” and spend it directly into the economy as required (without taxing or borrowing from the private sector as required, to transition to a green economy ASAP, instead of relying on politically contested ineffective carbon trading schemes and carbon taxes in free markets…which will cost consumers (and hurt the poor the most).
ROSS GITTINS: Funding the budget by printing money is closer than you think
And inflation? Read a book and learn how to contribute to a sustainable high quality prosperous circular economy, to rid the economy of all the unnecessary health and wealth destroying consumption presently ravaging the globe (not to mention dysfunctional economies with 50% unemployment…which cost the Haitian president his life and are currently causing chaos in S. Africa and Lebanon and Iraq…).
The issue is productive sustainable mobilization of the world’s resources, not BS about the ‘price’ of money caused by ‘excess demand’. Everyone CAN be decently housed, fed. and engaged. Classical economics is obsolete in an age of advancing AI and IT. There need be no ‘excess demand’ for ‘scarce’ resources.
Warning to all junk for-profit producers, your days are numbered, the world doesn’t need you, the massive waste of resources in transport, advertising, sales and staff are unsustainable on a finite planet…. and decent public education will inform the public why you have to go.