The only problem with taking credit for low interest rates is that you have take the blame when they rise, as Team Howard-Costello have discovered five times since the last election. With another rate rise looking possible before November 24, Crikey put two questions to four of Australia’s leading economists: How much control does the government actually have over the CPI figures, and should we be blaming Howard and Costello for a potential rate rise?
Joshua Williams, senior economist at TD securities:
Directly, the government has zero control over the CPI. They do however have some indirect control insofar as their spending and taxation plans change the price of various goods and services included in the measurement of the CPI. As for whether we should be blaming them, the rise in the CPI comes from a lot of factors. But as with the first part of the question, no direct blame can be made, but indirectly, changes to government policies can distort the headline rate of inflation. For example, the September quarter headline rate of inflation would have been higher but for changes to government welfare arrangements for childcare that lowered education and housing. However, if the government, publicly at least, takes the credit for when inflation is low, logic dictates that they should also take the rap when it’s high.
Get Crikey FREE to your inbox every weekday morning with the Crikey Worm.
Saul Eslake, Chief Economist, ANZ
One thing the government did that massaged the CPI downwards was the changes to the childcare rebate and tax credit arrangements which knocked 0.2% off the headline inflation rate. Beyond things like that and the Medicare safety net and the pharmaceutical benefits safety, which also have a direct effect, very few things have a direct impact on the CPI throughout the year. They have had an indirect impact via the way in which repeated rounds of tax cuts have boosted consumer spending and thus created circumstances in which it is easier for businesses to pass on cost increases in the form of price increases. Indirectly therefore, they do bear some responsibility for the rise in underlying inflation.
Dr Frank Gelber, Chief economist, BIS Shrapnel
In this circumstance I would think not a great deal. I don’t think they can take a lot of the credit and I don’t think they can take a lot of the blame. Now that we’re in a reasonably decentralised system it’s more about market forces. The inflation that’s coming through is demand inflation. In terms of inflation, the problem is that we have a very strong economy, we have labour skills shortages, very moderate inflow into wages but enough that if it was left to itself we would have much higher inflation much sooner … Have they done enough in the last three years? In terms of skills shortage, no. In terms of freeing up the labour market, yes. In terms of keeping constraints on award wages, probably yes. Could they have done more? Yes, they could have done more but actually they were very lucky. If we didn’t have the rise in the dollar we would have had a much bigger inflation problem a long time ago. This isn’t the end of interest rate rises. The question is how many we will have before this is all over.
Shane Oliver, Chief Economist, AMP Capital Investors
In the short term it has no control. I think the link between the government and the CPI is low. The real driver of strong inflation figures in Australia is a strong economy, and that reflects largely on the fact that the resources boom has led to a huge boost in national income that has flowed over into other things such as the pickup in underlying inflation to around 3%. At the end of the day the government can have an influence with spending on things like infrastructure, but it’s a long-term impact. I think the real driver here is the strong economy which largely reflects the resources boom, which is largely out of the government’s control.