Gittins: Inflation panic is rubbish

A nice pice today from economics greybeard Ross Gittins:

I can’t remember a time when the arguments of all those bank and business economists claiming “the inflation genie is well and truly out of the bottle” and demanding the Reserve Bank raise interest rates immediately and repeatedly have been so unconvincing.

At base, their problem is their unstated assumption that the era of globalisation means all the advanced economies have identical problems for the same reasons and at the same time.

…That stereotype doesn’t fit the peculiar circumstances behind this rise in prices, nor does it fit the way globalisation, skill-biased technological change, the deregulation of centralised wage-fixing and the huge decline in union membership have stripped employees of their former bargaining power.

The first thing to understand is that our price rises have come predominantly from shocks to supply: the various supply-chain disruptions caused by the pandemic, the war on Ukraine’s effect on oil and gas prices, and climate change’s effect on meat prices.

…Two thirds of the quarterly increase in prices came from four items. In order of effect on the index: cost of new dwellings (up 5.7 per cent), fuel prices (11 per cent), university fees (6.3 per cent) and food (2.8 per cent).

Of those, only new dwelling prices can be attributed mainly to strong demand, coming from the now-ended HomeBuilder stimulus measure. The rise in uni fees was a decision of the Morrison government.

America’s economy is “overheating”, but ours isn’t. It’s true our jobs market is very tight, and that much of this strength is owed to our now-discontinued stimulus measures.

But, paradoxically, the economics profession’s ideological commitment to growth by immigration has blinded it to the obvious: job vacancies are at record levels also because of another pandemic-related supply constraint: our economy has been closed to all imported labour (and we even sent a fair bit of it back home). This constraint has already been lifted.

The thing about supply shocks is that they’re once-only and not permanent. So, left to its own devices, without further shocks the rate of price increase should fall back over time. Petrol and diesel prices, for instance, have already fallen a bit but, in any case, won’t keep rising by 35 per cent a year year-after-year.

Spot on, Rossco. Slavering markets and the RBA are pushing the Australian economy unnecessarily into the global bust.

Houses and Holes

Comments

    • Indeed. I say ‘tough titties’ to those complaining about the … bust!

  1. DingwallMEMBER

    America’s economy is “overheating”, but ours isn’t. It’s true our jobs market is very tight, and that much of this strength is owed to our now-discontinued stimulus measures.
    Bwaahahahahaaaaahhaaaa … our economy is real estate ……….. but it isn’t overheated? Ffs it’s bloody on fire Ross … look out the window.
    As for the jobs market, the incremental surge is due to Uber and real estate.

    • GarethMEMBER

      Ross is right, look at wages. Against CPI (5.1%), wages (2.3% or so) are going backwards. As such, people are approximately -3% worse off if they have to buy stuff and earn an income. If you live off assets (not income), different rules apply.

  2. CarlosMEMBER

    Business wont drop prices until it is forced to (even if costs drop back), they’ll keep anything extra they can for as long as they can.
    The war is not going away, nor is CC, so that might stick for a while.
    Fuel will give us a 22c poke in the eye come Sept when the excise is reinstated too. There will be more howls about that
    May not be as ‘bad’ as elsewhere, but dont think its gonna be gone back to 2% inflation anytime soon.
    and for such a healthy economy that we are told time and again by herr scomo, IRs should be somewhat higher. Keeping them at 0.1% is irresponsible …….. and plain stupid

  3. Leroy Huggins

    Analysis of the reserve banking system has always made more sense if one takes the view that they are there to manage and create financial pain, not avoid it. Because if you can control the timing of such things, you can concentrate wealth much more effectively, and elicit control over society much more effectively, than the other way around.

  4. Ronin8317MEMBER

    2.8% for food is not what most people are experiencing at the supermarket checkout. It is inflation expectation, rather than the actual inflation itself, that drives the inflationary spiral.

  5. AdrienneMEMBER

    You have got to be kidding… Some people will come up with ANY excuse to avoid ending this zero interest rate insanity.

    Some of the supply shocks mentioned are certainly adding fuel to the inflation fire, but the fire wouldn’t be here without the oxygen provided by almost free money. Supply and demand, you don’t have a market without the other. To blame supply shocks without addressing the insatiable demand is a little naïve.

    • GarethMEMBER

      Wage data doesn’t justify the rate rise unless we are prepared to be even poorer than CPI inflation is causing. CPI doesn’t affect the asset and cash rich because their % of income on consumption is minimal, it hits average people hardest. Average people are not seeing pay increases to match price increases.

      • AdrienneMEMBER

        “Average people are not seeing pay increases to match price increases.”

        True. But by you logic we should keep inflation running hot so average people start seeing pay increases while still seeing even increased CPI increases. That becomes a zero sum game with everybody being the loser as inflation spirals upwards.

        The fact that average people aren’t seeing a commensurate raise in income to match price rise goes hand in hand with the supply shock reality. The reality is that we can now afford less, that is the REAL economic reality. Pushing more money into the system won’t change that.

        • GarethMEMBER

          CPI will do its thing but wage growth requires different issues to be addressed. Our economy is built on a very high cost base meaning margins are tight and there is not enough fat for most companies to pay more. Also, those workers, no matter how highly paid have to pay a huge amount of that income on base services, food and rent.

          US doesn’t have this same problem so companies will compete with others for staff using pay rise. That extra income can be used as discretionary spending by workers, thus driving inflation.

          The only people spending big in the AU economy are asset owners and boomers. Most of them are not dependent on PAYG incomes.

      • CarlosMEMBER

        How long should we drag the current situation out for then ?
        None of this is ‘fixed’ by keeping the status quo. It may or may not be fixed by breaking it, but worth a try, as the middle and lower classes standard of living will continue to dwindle, slowly but surely.
        Wages are stuck for many reasons including significant restraint on organised bargaining and/or action, and the simple fact lower and middle wage earners simply cannot afford to withdraw labour. Capital owners know this as it was designed for them.
        A chart / timeline showing removal of labour protections v wage declines v reliance on credit would be interesting.
        Nothing will change without significant adversity, and that includes taking some of top with it when the bottom goes down.

        • GarethMEMBER

          Agree that adversity is the only thing that will change the outcome. However, you have to make sure it impacts those who have made out like bandits and screwed everyone below them. Boomers and asset owners need to suffer, not the PAYG and younger gens. Tax the crap out of unearned wealth and asset appreciation, reward work instead.

  6. Goldstandard1MEMBER

    So interest rates need to get back to neutral which is cash rate at 2.5% so that allows debt level and risk to return to whatever normal is. You cannot allow ppl to leverage up when the economy is broken, that is why interest rates should have gobe up last year and why now there is no alternative.

    • Agreed. If neutral OCR is 2.5% then the cash rate at 0.1% remains inappropriately loose for an economy operating more or less at capacity, with core inflation at target and inflation expectations inside tbe target zone.

      Appropriate policy is for the RBA to start withdrawing stimulus as soon as possible, and then hike the OCR in a measured fashion back towards the 2.5% neutral rate. If the inflation genie does appear to be getting out of the box – and we’d see that in a range of indicators such as inflation swaps – they can accelerate the pace and take the terminal rate into tightness territory. And if Leith is right and things fall apart, they can stop and sti have policy easy. Either way, they need to start hiking rates now as policy is inappropriately loose.

      • BabundaMEMBER

        Spot on. It has to be done at some point and there may never be a better time than now

    • kierans777MEMBER

      Interest rates should have started to go back up in 2012. Only the RBA has it’s head up it’s backside. Just keep kicking the can down the road.

    • GarethMEMBER

      Completely disagree on this. Home loan debt is 2.5T on a 10T home equity valuation. Home debt is not a massive chunk of the pie. Jacking interest rates penalises the PAYG earner while older asset rich people remain unaffected.

      The solution is taxing unearned wealth, not those who had to take out a loan to put a roof over their head.

      Tax capital gains properly on PPOR, Investments and Shares. Lower the PAYG tax brackets and reward people for starting, growing and investing in businesses which employ people. Stop rewarding lazy capital.

      If we did this it would naturally deflate home prices as all the asset rich boomers could not game the system and walk away/pass on millions in cash/assets at the point of sale and death. If the tax man takes the marginal tax rate on any gains, the incentive to over invest in housing decreases. The whole economics of it changes.

      • Goldstandard1MEMBER

        You don’t have to disagree, both should be done of course. Emergency rates just give people fanatical cheap money inflating prices to repeat above steps. Now is the breaking point we’ve all been talking about.

  7. Perhaps old man Gittins can retire and live on a fixed income, lets see how non-existent the inflation is for him then.