Warren Hogan: “Australia doesn’t have an inflation problem”

Managing director of EQ Economics and economic adviser to Judo Bank, Warren Hogan, has written an article in The AFR arguing that “Australia doesn’t have an inflation problem”. Hogan has also argued that the RBA should not raise interest rates until wage growth has rebounded:

Australia doesn’t have an inflation problem. Higher wages growth is required to sustainably achieve 2 per cent inflation. Wages growth needs to be more than double the recent pace to qualify as an inflation problem.

Higher wage growth is also required to reduce financial stability risks, and it is essential for a balanced economy. To counter rising nominal wages, policymakers and business will need to contain real unit labour costs through sensible policies that reduce non-wage labour costs and through investment that boosts productivity.

The rise in actual inflation over the past six months is making the RBA’s policy strategy increasingly difficult to execute.

Not only is it going to be politically difficult to allow inflation to run well ahead of wages for a period, but when we do get the inevitable wage response, the RBA is going to have to tap on the monetary breaks quickly or risk entrenching inflation within the economy, the problem the Fed is now confronting.

The problem is the policy starting point. Australia’s monetary policy is too stimulatory. The remaining unconventional policy tools can be jettisoned reasonably easy. QE and forward guidance should go at next week’s board meeting…

The monetary policy strategy from here requires another six months of patience and then a quick and concerted monetary tightening once tight labour markets are generating higher wages…

The next move in the cash rate shouldn’t be until later in the year, but it needs to be big, at least 40 basis points, if not 90. Get the cash rate to 1 per cent, let that flow around the economy and watch for a while.

My view is that the RBA will wait for next month’s Q4 wage growth data before changing its interest rate guidance, since this will indicate the degree by which inflation is being domestically generated rather than imported.

Interest rates are a demand management tool. As such, there isn’t much sense in raising rates to counter imported (cost-push) inflation.

Australia’s wage growth was only 2.2% in the year to September 2021, and the RBA has indicated that wage growth needs to move above 3% before it will trigger sustainable inflationary pressures.

Given the tightness in the Australian labour market, which has seen both unemployment (4.2%) and underemployment (6.6%) fall to their lowest levels since 2008, there is a good chance that wage growth picked-up in the December quarter.

Thus, if wage growth solidly beats expectations in Q4, and rises again in Q1 and Q2, then the RBA will have the necessary ammunition to begin lifting interest rate rises.

In short, wage growth is the key.

Unconventional Economist

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