ABC finally covers the “forbidden topic: Immigration and inflation”


Thank god for Ian Verrender, the last voice of sanity at your destroyed ABC.

If only there was a diagnosed condition called One Size Fits All (OSFA) syndrome.

The chances are that, if that were the case, a significant portion of our economic gurus might just find themselves exiting their shrink and heading down to the nearest pharmacy for some relief.

In the past few months, many of our soothsayers have mostly all shifted gears on the future direction of interest rates.


What early this year was a near-unanimous call for multiple rate cuts has suddenly been abandoned, replaced instead by predictions of further possible interest rate hikes.

Even those who reckon higher rates are wide of the mark have adopted the “higher for longer” argument.

There’s no doubt that inflation, while still reducing, is no longer fading as quickly as it once was and no longer is uniform.


The prices for stuff we buy, such as clothes and household goods, are going backwards. It’s not just that price rises are slowing. They’re actually getting cheaper.

But the prices for essential services, such as rent, health and education, are soaring. That’s helped push one measure of price rises — core inflation — higher on a quarterly measure.

Quick as a flash, that’s sparked a renewed demand from some sections of the economics commentariat for further rate hikes to smash the evils of inflation once and for all.


It’s there in black and white in all the manuals. If inflation becomes a problem, raise interest rates and keep doing it until inflation is vanquished, regardless of the consequences.

So far, it’s worked. We’ve either put off buying or cut back on a whole raft of things we’ve deemed aren’t essential.


But there are some purchases over which you have no power. And that raises a question: Are our decisions on whether to go to the doctor, put a roof over our head or go to school influenced by interest rates?

If the answer to that is yes, then we’ll pay for it down the track.

But we have no power to only pay two-thirds of the rent or maybe just go to school for three days this week to save on expenses.


There goes the budget cash splash

While interest rates are likely to be kept on hold at today’s Reserve Bank board meeting, the RBA could suggest that inflation will remain a problem for longer. And the tone of the accompanying statement could play havoc with the federal government’s plans.

A week from now, Treasurer Jim Chalmers will hand down a federal budget that, until a few months ago, was supposed to be all about spurring growth rather than taming inflation.


That was when everyone, including Reserve Bank governor Michele Bullock, was convinced the economy was slowing rapidly.

It made for a handy political narrative. In the lead-up to an election, the federal government not only could boast it had reined in an inflationary outbreak but could also open the chequebook to spend up big to kick the economy into gear.

Now, no-one is sure just where we’re headed. Inflation is falling but not as quickly as anticipated, while employment remains incredibly strong with solid wages growth. And property prices are back to record levels.


That’s giving ammunition to those arguing for more rate hikes.

At a household level, however, things look to be unravelling. Savings are falling and retail sales have been abysmal for most of the past year, with figures last week showing an alarming slide.

Meanwhile, insolvencies among small and medium-sized firms have hit record levels.


Why is inflation proving difficult to contain?

The buzzword right now is sticky. Inflation is sticky and the really sticky stuff is services inflation.

The graph below separates inflation between the stuff we can trade with other countries and the goods and services that are mostly influenced by domestic factors. We’re talking about things like rent, insurance and education.


That’s the darker line. As you can see, it hasn’t fallen as sharply as prices for tradeable goods.

Which is why everyone says we have a homegrown inflation problem. And that’s what’s creating panic for some of our economic experts.

But take a look back at the time before the pandemic.


Inflation for non-tradeables was higher at every point in the six years leading up to the lockdowns. It then had a delayed reaction to tradeables on the way up. And now it’s lagging on the way down.

Is that really a good enough reason to argue for more rate hikes?

Let’s delve a little more. According to the Bureau of Statistics, rents rose 7.8 per cent in the year to the end of March. That’s the strongest growth in 15 years, as vacancy rates dropped to 1 per cent nationally.


Housing is one of the largest components in the basket of goods and services that measures inflation and, with insurance and education, a prime source of our recent uptick in inflation.

And now consider why rents are soaring. Could it be that we aren’t building enough dwellings to house the large influx of new arrivals?


As Commonwealth Bank senior economist Gareth Aird wrote last week: “Incredibly strong net overseas immigration has put upward pressure on some components of the Consumer Price Index basket.

“This has made the RBA’s task of returning the inflation to target more difficult,” he wrote.

How will higher interest rates solve that problem?


Perhaps an easier and more immediate way to reduce inflationary pressure would be, instead of considering rate hikes, to limit our immigration to a point that balances dwelling construction.

I’m alright Jack

Combating inflation should be an exercise in spreading the pain to ensure all levels of society pitch in.

Relying on just one blunt tool, interest rates, unfortunately ensures that the young and most heavily indebted do most of the heavy lifting.


As the International Monetary Fund recently pointed out, Australian households have been most affected by mortgage rises given we overwhelmingly take out variable-rate housing loans.

One way to spread the burden is for government to use its tax and spending policies to back up the RBA, which is what largely has been happening.


Until now, the federal government has been careful to exercise prudence by clocking up budget surpluses and banking the proceeds.

But that’s going to be increasingly difficult after the stage 3 tax cuts are delivered in July. The changes will pump about $20 billion into the economy in the year alone, right at a time there’s been a hiccup with halting inflation.

It shouldn’t come as any real surprise that many of those now arguing for higher interest rates were among the most vocal in pushing for the income tax cuts that will mostly deliver benefits to wealthier Australians.


Oddly, none of them are calling for the tax cuts to be delayed a year or so to help out with inflation.

When the facts change

The problem with rigidly sticking to theories is that they often fail us.


If you haven’t seen the recent Hollywood blockbuster Oppenheimer, it’s well worth a look. At one point, Oppy presents an elegantly constructed defence of his conclusion — backed up by blackboards full of incomprehensible mathematical equations — that splitting the atom is impossible.

“But the Germans have just done it,” he’s told.

He quickly moved on, especially after his own team repeated the feat.

When it comes to inflation, many of our brightest minds cling to the results of the great experiment of the 1990s, when interest rates were pushed into orbit, creating a massive global recession from which we emerged with inflation under control.


But it wasn’t all down to monetary policy. There were other factors at work too. Globalisation was taking hold and much of the West’s heavy industry moved to China, which produced all manner of industrial and household goods at such scale that costs fell across the globe.

That era is over and, right now, many nations are looking to bring more industries back home, all of which means that the inflation targets to which we once held may not apply in the future.


Then there’s the energy transition. That’s likely to take longer, with potentially higher costs that will keep prices higher for longer.

Jacking up interest rates is designed to stop us spending. The evidence shows that is exactly what’s happening. Many are only spending on necessities.

Forcing the most vulnerable to cut back on those could create a bigger problem than inflation.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.