When the Reserve Bank governor suggests “we”
are to blame through our consumption patterns for a rate rise he is, in part,
correct. That the Reserve Bank had no choice, as suggested by John Howard, is
also correct. It had no choice because we do have consumption and investment
patterns that are problematic. Moreover, it had no choice because we limit the
tools with which we manage the economy.

Using interest rates as a blunt
management tool to rein in economic activity and inflation works, roughly, but
is problematic. It is imperfect and indiscriminate in its effect on economic
participants who do not necessarily contribute to inflationary
stimulators. As
an example, someone occupying their own home, paying a mortgage, spending an
average wage on basic living functions such as groceries, mortgage and utilities
payments, perhaps (though less likely) saving a part of that wage (either
through bank deposit or superannuation) and utilising a smaller component in
discretionary spending is not, in the greater scheme of things, overly
contributing to inflation. It would appear that this modest lifestyle is the
exception. If you are one of these people, you will be underwriting the cost of
interest rate rises for the behaviour of others.

There
are “external” factors. Purchase of fuel now requires greater expenditure but
will, in many cases, result in less use of fuel. Food
costs have been going up, in part because of fuel charges, in part because of
seasonal factors. But while cutting into wages, these costs are not, in and of themselves,
inflationary.

The
inflationary cycle kicks in when there is a price rise (food, fuel or otherwise)
followed by a wage rise. This is something the ACTU has never understood. Each
time the ACTU demands yet another wage rise it hurts retired people living on a
fixed income. Prices rise and the purchasing power of the retired is hit. For
some reason the ACTU has always acted as if it hates retirees. For those living
on deposited funds, and reliant on interest levels for greater income, a rate
rise has a short term benefit. But these are people who essentially have
relatively fixed expenditure patterns, that change only when a larger quantum of
discretionary income is made available. A rate rise dampens expenditure at the
younger end of the consumer spectrum but allows a greater expenditure pattern to
occur at the top end.

Let us not forget
the inflationary effect of the eternal drive for profit. The ACTU and
its ilk cannot share all the blame. Deregulation, competition and
globalisation have been touted as delivering better quality at a lower
cost. Hence we can only assume, with increases in electricity rates,
council rates, goods and services, that other factors are preventing
this happy state of affairs. Some blame can be attributed to
environmental compliance costs, increased quality (though not much)
through new processes and geographical factors. The reality is however,
that were it not for competition and the underwriting of inflation
prevention in Australia by Chinese manufacturing, market inefficiencies
and a profit motive driven to excess would be prevailing. As would
inflation…

Read the full article on the Crikey website here

Peter Fray

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