My Blog

Tag: Inflation & Cost of Living

  • RBA Review a Missed Opportunity

    The report represents the most important reconsideration of monetary policy in Australia since the advent of inflation targeting three decades ago. But the “new look” RBA after this review may even do more harm to the economy than in the past. This is because the independent review panel missed the opportunity to question the deeper myths and assumptions regarding the central bank’s infallibility and their ideological bias.

    In this report, Centre for Future Work Associate Dr Anis Chowdhury catalogues the assumptions and failures of conventional inflation targeting policy, and the misleading nature of so-called ‘independent’ central banks. He argues the review panel missed an historic opportunity to reconsider those assumptions, and help craft a more balanced and democratic macroeconomic policy framework.

    The post RBA Review a Missed Opportunity appeared first on The Australia Institute's Centre for Future Work.

  • The Reserve Bank’s decision to raise rates shows a total lack of coherency

    Yesterday the Reserve Bank shocked markets and most economists by raising the cash rate to 3.85%. But it didn’t just contradict outside observers, it contradicted the views of the RBA board just one month ago when it decided to keep rates steady.

    Policy director Greg Jericho, writes in his Guardian Australia column that in the month since the April RBA meeting data on inflation has suggested faster than anticipated slowing, the economy overall is now expected to slow more quickly, and there is no sign of long-term wages growth rising beyond what would be consistent with 3% inflation.

    And yet despite this, the board decided to raise rates.

    The decision smacks of a board reacting less to economic conditions and more to the recent Review of the RBA which recommended taking the decisions to change rates away from the current board.

    The Reserve Bank suggested a month ago it needed time to pause and review. Nothing in the intervening time has suggested they made a mistake in not continuing to raise rate, and yet the bank seems determined to slow the economy and raise unemployment to 4.5%.

    The bank is so beholden to neo-liberal views of the non-accelerating inflation rate of unemployment that it is determined to keep raising rates until unemployment rises to a level it believes is “full employment”.

    We know the current level of inflation is largely driven by corporate profits and some overhang of supply-side issues and savings from the pandemic/lockdown period. At no point is there any sign that wages are rising in a manner that is fueling inflation and yet the RBA continues to attack inflation like we are experiencing the mining boom of the 2000s which saw wages and jobs grow strongly, rather than the current boom which is seeing profits grow exponentially and real wages plunge .

    The post The Reserve Bank’s decision to raise rates shows a total lack of coherency appeared first on The Australia Institute's Centre for Future Work.

  • Latest inflation figures show the RBA was right not to raise rates in April

    The March quarter consumer price index figures showed a 7.0% annual rise, however as Policy Director, Greg Jericho, notes in his Guardian Australia column, the monthly inflation figures that were also released on Wednesday showed annual growth had fallen to 6.3%.

    This fall was down from a peak of 8.4% in December and is the slowest growth since May last year.

    The figures reinforce the belief that the RBA board was right to ignore the views of many economists both within and outside the Reserve Bank. Not only is inflation falling but the biggest drivers of inflation in the March quarter were in areas with prices mostly determined by governments or in highly regulated sectors such as the gas and electricity markets. There was little sense of prices rising due to excess demand, rather the combination of price setting in the public sector and by commercial companies making use of high world prices for resources and ongoing supply issues in the housing market served to drive nearly two-thirds of the total increase in overall inflation the March quarter.

    Increasing interest rates would have done nothing to lower prices in these areas – indeed in the rental market any further rates rises would likely be just used as reason for increasing rents more.

    The Reserve Bank was right to stop raising rates. Should the slowing of inflation shows signs of ending before reaching the RBA’s target of 3% it can always cut rates then. For now, inflation is falling as hoped and attention must be drawn to those suffering the most from the rising prices – notably low-income households and those paying off a HELP debt that is set to be indexed by 7.1% – well above the current levels of wage growth.

    The post Latest inflation figures show the RBA was right not to raise rates in April appeared first on The Australia Institute's Centre for Future Work.

  • 7% Minimum Wage Rise Would Tackle Inflation, not Feed it: Research

    A 7% minimum wage rise would have a virtually undetectable impact on economy-wide prices.

  • Minimum wages and inflation (2023)

    New research from the Centre for Future Work at the Australia Institute has revealed how rises in the minimum wage have almost no impact on inflation and given the collapse in the value of the minimum wage in real terms over the past 2 years, a 7% increase is a necessary recompense for Australia’s lowest paid workers.

    Each year the Fair Work Commission conducts the Annual Wage Review (AWR) which determines the national minimum and award wages. And each year it is met with a chorus of cries from business groups, conservative politicians and commentators that Australia’s economy will surely break should the minimum wage be raised too much.

    Over the past two years however, the minimum wage has risen by less than inflation, causing a significant decline in the real purchasing power of millions of workers covered by the Modern Award system. This marks the first time in a quarter-century that the minimum wage has had a deflationary impact on the economy (that is, increased by less than the inflation rate) over successive years.

    Despite this fall, once again, submissions from business groups to this year’s AWR have called for rises below inflation, and have cited concerns about a wage-price spiral as justification for advocating a further erosion of low-paid worker’s living standards.

    But research by Greg Jericho and Jim Stanford shows that minimum wage increases over the past 25 years have had little to no impact on inflation at all. It also demonstrates that a 1% increase in the minimum wage and all Modern Award wages – even if completely passed through into higher prices – would result in a virtually undetectable 0.06% increase in economy-wide prices. So small is this that a mere 0.2% fall in profits would be enough to cancel any impact on prices at all.

    The research reveals that the call from the Australian Council of Trade Unions for a 7% increase in the national minimum wage would make up a portion (but not all) of the real wage losses, workers have experienced in the past two years. Even if fully passed on in higher prices, with no reduction in current record-high business profits, a 7% minimum wage hike would at most translate into an increase of just 0.4% in economy-wide prices.

    Alternatively, that 0.4% rise could be offset by just a 1.4% reduction in total corporate profits.

    With inflation passing its peak, there is no cause for concern that a minimum wage rise of 7% (equal to the annual rate to the March quarter) would add fuel to the inflation fire.

    This reinforces recent research by the Centre for Future Work that profit margins are presently at record highs in Australia, because companies have increased prices since the pandemic far more than their own input costs. This gives companies ample cushion to absorb the cost of higher minimum wages, with no impact on prices at all.

    In sum, the impact of minimum wage increases on average prices is thus little more than a rounding error. But for the 20% of employees who earn either the national minimum wage or wages set under Modern Awards, a strong minimum wage increase will be vital. It will ensure that the lowest paid, who have already been most hurt by inflation, are not forced to suffer more due to an inflationary upsurge that was ultimately spurred by higher profits, not wages.

    The post Minimum wages and inflation appeared first on The Australia Institute's Centre for Future Work.

  • With the impact of rate rises still to come the RBA is wise to pause

    Since April the Reserve Bank has increased the cash rate by 350 basis points from 0.1% to 3.60% – the fastest and largest increase since the late 1980s. But as policy director Greg Jericho notes in his Guardian Australia column, perhaps as much as a third of the rate rises have yet to fully flow through to the economy.

    While the interest rate of new mortgages has risen the full amount, the average rate of all mortgages has only risen around 209 basis points – with many mortgage holders still yet to have their repayments increase due to the rate rates in December, let alone those in February and March.

    The Reserve Bank noted this in its statement and stressed the need to gather more information before deciding whether to increase rates or keep them steady.

    The most recent GDP figures show the economy overall has slowed and the signs of inflation are that the peak has been reached and much like the USA, it is not heading down. While the path to 3% inflation might take some time there seems little sense of long-term expectations rising and the 350 basis points worth of rises makes it clear the RBA is prepared to act if it believes inflation is accelerating.

    The Centre For Future Work has been calling for a pause in the rates and it welcomes this decision by the RBA. There is minimal risk from observing the data after 10 successive rate rises. And workers whose wages have not kept pace with inflation will be relieved that the RBA is paying heed to warnings that slowing the economy too fast in an environment where inflation has peaked only increases the risks of sending the economy into a recession

    The post With the impact of rate rises still to come the RBA is wise to pause appeared first on The Australia Institute's Centre for Future Work.

  • Profits and Inflation in Mining and Non-Mining Sectors

    A previous report from the Centre showed that 69% of excess inflation (above the Reserve Bank’s 2.5% target) since end-2019 arose from higher unit corporate profit margins, while only 18% was due to labour costs. The new research provides detail on the distribution of those excess profits across different sectors in the Australian economy.

    By far the biggest profits were recorded in the mining sector, where corporate operating profits surged 89% since the onset of the pandemic. Those profits resulted from sky-high prices for fossil fuel energy (including petroleum products, gas, and coal). Thanks to those price hikes, the mining sector now captures over half of all corporate profits in the entire Australian economy.

    Less spectacular but significant increases in corporate profits are visible in several other sectors of the economy, too – not just mining. Profits swelled rapidly in wholesale trade, manufacturing, transportation, and other strategic sectors.

    In these strategic industries, businesses could exploit supply chain disruptions, consumer desperation, and oligopolistic market power to increase prices well beyond production costs.

    In other sectors (including arts & recreation, hospitality, and telecommunications) profits have been flat or falling since the pandemic.

    Early signs in 2023 that inflation (and corporate profits) had peaked, and were returning to normal, have been thrown into question by a renewed threat of profit-price inflation: the OPEC+ cartel decided earlier this month to curtail oil production to boost world prices.

    Policy-makers need to acknowledge the role of record profits in driving recent inflation – and develop alternative policy responses (such as price caps in strategic markets, excess profit taxes, and targeted fiscal support for working and low-income households) to manage current inflation in a fairer and more effective way.

    The post Profits and Inflation in Mining and Non-Mining Sectors appeared first on The Australia Institute's Centre for Future Work.

  • The housing market has cooled, but housing unaffordability remains a long way off

    The most recent data on the value of dwelling around Australia reveals the prices in most capital cities have fallen over the past year and are likely to keep doing so for some months. But the data also shows that housing affordability remains a long way from repairing the decades of damage.

    In his Guardian Australia column, policy director, Greg Jericho, notes that the impact of interest rate rises has definitely caused the housing market to come off the boil. In most capital cities median house prices are now below what they were a year ago. Coming as this does off data suggesting wages are not rising as fast as the Reserve Bank feared, and amid the ructions in the USA financial system after the Silicon Valley Bank collapse, the Reserve Bank certainly has enough reason to not raise rates again.

    But while the fall in house prices does help those trying to buy a home, the decrease in affordability is highlighted by the fact that while house prices are mostly below what they were a year ago, they are well above what they were 2 years ago in all capital cities. And those rises have been well above the growth in wages in that time.

    Jericho notes that in Sydney for example, wages and house prices from 2003-2013 largely rose in line but over the past decade house prices have surged above wages. Had prices instead continued to rise in line with wages the median house price in Sydney would now be $863,000 rather than $1,270,000.

    This disconnect is replicated around the country with house prices being some 60% above what they would have been had they risen along with wages. In Hobart the current median house price of $727,000 is some 133% above the price it would have been had they rinse in line with wages in Tasmania of $297,000.

    This disconnect highlights the need for tax reform of the housing market, an increase in supply including increased median density housing, and especially public housing.

    And above all we need wages to no longer be left behind.

    The post The housing market has cooled, but housing unaffordability remains a long way off appeared first on The Australia Institute's Centre for Future Work.

  • Australian Inflation Reflects a Historic Redistribution from Workers to Bosses

    Meanwhile, business profits have expanded strongly through this inflationary episode. Companies haven’t just passed along higher input costs to their customers. Rather, they have taken advantage of the conjuncture of factors related to the pandemic (supply shortages and disruptions, consumer desperation and pent-up demand, and oligopolistic pricing power) to push up prices far higher than needed to cover their own costs.

    The result has been a process of ‘profit-price inflation’: higher profit margins are both a cause and consequence of rapid inflation. Centre for Future Work Director Jim Stanford discusses the distributional impacts of recent inflation in this new commentary for The Conversation: Underlying Australia’s inflation problem is a historic shift of income from workers to corporate profits

    The post Australian Inflation Reflects a Historic Redistribution from Workers to Bosses appeared first on The Australia Institute's Centre for Future Work.

  • Profit-Price Spiral: Excess Profits Fuelling Inflation & Interest Rates, not Wages

    The dramatic expansion of business profits has gone mostly ignored by the RBA and other macroeconomic policy-makers, who have focused instead on a supposed ‘wage-price’ spiral which does not exist. This suggests the focus of the RBA on wage restraint is misplaced and unfair, and that interest rates would be far lower today if companies had not gouged customers at the checkout.

    The report Profit-Price Spiral: The Truth Behind Australia’s Inflation (attached) comes in the same week supermarket giants Woolworths and Coles posted soaring profits, with banks, gas and petrol companies posting similarly soaring returns.

    Key Findings:

    • A Profit-Price spiral is the main driver of inflation in Australia, rather than a supposed “Wage-Price” spiral, which does not exist
    • As of the September quarter of 2022 (most recent data available), Australian businesses increased prices by a total of $160 billion per year over and above their higher expenses for labour, taxes, and other inputs, and over and above profits generated by growth in real economic output
    • Without the inclusion of those excess profits in final prices for Australian-made goods and services, inflation since the pandemic would have been much slower: an annual average of 2.7% per year, barely half of the 5.2% annual average actually recorded since end-2019.
    • That pace of inflation would have fallen within the RBA’s target inflation band (equal to its 2.5% target, plus-or-minus 0.5%)
    • Excess corporate profits account for 69% of additional inflation beyond the RBA’s target. Rising unit labour costs account for just 18% of that inflation
    • The RBAs 9 back-to-back interest rate rises would have been unlikely without excess profits and prices based on the RBA’s own policy framework
    • Real wages in Australia fell 4.5% in 2022, the largest fall on record

    “This empirical evidence shows excess corporate profits are the main culprit driving inflation, not workers’ wages,” said Dr. Jim Stanford from the Australia Institute’s Centre for Future Work.

    “For Australians doing it tough this data would be aggravating.

    “We’ve been told a story that workers need to restrict wage growth and accept a permanent reduction in living standards in order to fix inflation. This evidence shows that’s an economic fairytale.

    “ABS data shows that without excess price hikes through the pandemic, inflation would likely be within the RBA target band, and hence there would be no need for the nine extreme, back-to-back interest rate rises that are crushing households and mortgage holders, fuelling the cost-of-living crisis.

    “The pain experienced by workers through current inflation contrasts sharply with unprecedented increases in business profitability at the same time.

    “Through this episode of post-COVID inflation, real wages have declined rapidly, labour’s share of GDP has declined, and corporate profits have set records. That is completely opposite from the experience of the 1970s, when real wages rose, labour’s share of GDP increased, and corporate profit margins fell.

    “History confirms that fears of a 1970s-style ‘wage price spiral’ are simply not justified or grounded in reality. Instead, inflation in Australia since the pandemic clearly reflects a profit-price dynamic.”

    The new report ‘Profit-Price Spiral: The Truth Behind Australia’s Inflation’ is attached and comes from the Australia Institute’s Centre for Future Work, by Dr. Jim Stanford.

    Supermarkets, banks and petrol companies have recently posted huge profits:

    The post Profit-Price Spiral: Excess Profits Fuelling Inflation & Interest Rates, not Wages appeared first on The Australia Institute's Centre for Future Work.