You could almost hear the agonised cries from the monetary galahs at 11.30am yesterday when the Australian Bureau of Statistics revealed that inflation in the June quarter was weaker than expected, with growth of just 2.1% in the year to June, and the Reserve Bank’s preferred measures, the trimmed mean and weighted median, falling slightly to 1.9%.
The result pushes the prospect of the next interest rate rise into 2020 and the (small) likelihood of the next movement being a rate cut up — a prospect infuriating to the Financial Review and neoliberal economists like Warwick McKibbin and Warren Hogan. They’ve been campaigning for a punitive hike in interest rates, even if it hurts employment, simply because they don’t like loose monetary policy.
Deeply aggrieved that reality has contradicted its campaigning, the Fin today went into full denialist mode. Low inflation wasn’t the problem, it raged in a hilarious editorial this morning; the Reserve Bank’s inflation target was. It needed to be halved from its current 2-3% to 1-2%. As an example of shifting the goalposts, it’s one of the better ones we’ve seen lately. At a stroke, the Fin could then have raged about how yesterday’s CPI result showed that inflation was now at the high end of the central bank’s inflation target and we urgently needed higher rates to slay the inflation beast. Frankly, we’re a little disappointed that Stutch and friends at the Fin didn’t show some real monetary discipline and demand an inflation rate of 0%. That would have shown ’em!
Then again, maybe’s that not such a bad idea given yesterday’s result give us another take on the “two-speed economy” issue. The CPI results for a few quarters now have shown the same pattern: inflation in the market sectors of the economy is non-existent — except for external factors like oil price spikes or fluctuations in fruit and veg prices, but even the lower Aussie dollar hasn’t translated into higher prices for imports. The main persistent source of what little inflation there is is governments, who either directly through taxes, charges and excise, or indirectly via price regulation or pressure on state-owned utilities, have been pushing up prices or allowing prices to rise in areas like utilities, health and child care. Yesterday’s figures, for example, show the main sources of inflation in the June quarter were petrol (external factors but also fuel excise), medical and hospital services (mostly controlled or heavily regulated by government) and tobacco (excise).
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That mirrors what’s been happening with wages, where private sector wages growth has been significantly underperforming compared to public sector wages, and the strongest sources of wages growth have been in the health, social care and education sectors where governments dominate. It’s a different kind of two-speed economy, in which governments are operating in a more traditional wages and prices mindset, while the private sector operates in a mindset that is hellbent on preventing workers from getting a pay rise because they’re convinced they can’t pass on any costs to consumers.
Then again, one of the reasons they can’t pass on costs to consumers is because consumers’ incomes aren’t growing and any growth in consumption is coming from households dipping further into their savings, not more income.
It’s the kind of economy that we were told back in the 1980s and 1990s by reformers and business was exactly what we needed: low inflation, low wage growth, high employment. Now we have it, and no one’s happy about it.