Yesterday (August 15, 2023), the Australian Bureau of Statistics released the latest – Wage Price Index, Australia – for the June-quarter 2023, which shows that the aggregate wage index rose by 0.8 per cent over the quarter (steady) and 3.6 per cent over the 12 months. This represented a slowdown over the 12 months on the previous quarter’s result. If we consider the rate of increase in the CPI in relation to this nominal wages growth then in the June-quarter the two were equal and so real wages were steady. However, over the last 12 months, real wages have fallen by 2.4 per cent using the CPI measure. But the ABS note that the CPI is not a good indicator of cost-of-living changes and they have produced special time series based on expenditure patterns for selected groups including employees. If we use the Employee Selected Cost of Living Indicator we find that real wages fell by 0.7 points over the June-quarter 2023 and by a stagerring 6 points over the 12 months. That puts the Treasurer’s spin that the latest data is a good sign into perspective. Further with the gap between productivity growth and real wages increasing, the massive redistribution of national income away from wages to profits continues. Further, the RBA continue to claim there is a threat of a wages breakout and so interest rates have to keep rising to create the necessary unemployment increase to prevent that from happening. It is just a ruse. There is no sign of a wages breakout.
The US Bureau of Labor Statistics released the latest US inflation data last week (August 10, 2023) – Consumer Price Index Summary – which showed that overall monthly inflation to be 0.2 per cent and mostly driven by housing. And, once we understand how the housing component is calculated then there is every reason to believe that this major driver of the current inflation rate will weaken considerably in the coming months. The rent component in the CPI has been a strong influence on the overall inflation rate and that has been pushed up by the Federal Reserve rate hikes.
The media and the phalanx of mainstream economists from banks etc, the latter of which have a vested interest in interest rates rising in Japan for various reasons, are constantly predicting that the Bank of Japan will relent to the ‘market pressure’ and reverse its current monetary policy stance and fall in line with the majority of central banks. While the concept of ‘market pressure’ is held out as some economic process – something inevitable to do with basic fundamentals governing resource supply and demand – it is really, in this context, just gambling positions that speculators have taken in the hope that the Bank will relent and reward their bets with stupendous profits. So last week, the Bank of Japan announced that it was changing its policy towards Yield Curve Control (YCC), which set the cat among the pigeons again. This is what it was all about.
On Friday (July 29, 2023), the Australian Bureau of Statistics released the latest – Retail Trade, Australia – data, which showed that total retail turnover fell by 0.8 per cent in June 2023 and was up 2.3 per cent on June 2022. In May 2023, it was up 4.1 per cent. So things have slowed. Almost all the components (Household goods, Clothing etc, Department stores, Cafes etc) were down on the month. The ABS noted that despite the massive EOFY sales, “retail turnover fell sharply … as cost-of-living pressures continued to weight on consumer spending”. By way of contrast, in the US the June data from the US Census Bureau – Advance Monthly Sales for Retail and Food Services (released July 18, 2023) – shows up 0.2 per cent in June. Moroever, the latest University of Michigan Survey of Consumer Sentiment results – Improving personal finances, business conditions lift consumer sentiment (released July 28, 2023) – reveal a sharp increase in consumer sentiment in the US. But there was a twist, which is the point of this post. The Survey reported “the material improvement in the economic experiences of consumers relative to the peak of high inflation last year … with the notable exception of lower-income consumers, who anticipate continued challenges from inflation and a potential weakening in labor market prospects.” What we will discuss today is that central bankers are effectively intent on increasing poverty in their societies. And, whichever way one looks at it, relying on such a pernicious policy tool – one that deliberately seeks to increase poverty – is not a sound basis for achieving social stability. And, and as inflation has been falling anyway, despite the hikes, the negative distributional impacts should militate against using such a nasty and inefficient instrument.
Today (July 26, 2023), the Australian Bureau of Statistics released the latest – Consumer Price Index, Australia – for the June-quarter 2023. It showed that the CPI rose 0.8 per cent in the quarter (down 0.6 points) and over the 12 months by 6.1 per cent (down 0.9 points). The annual inflation rate in Australia was significantly lower again in the June-quarter as the supply-side drivers abate. This was always going to be a transitory adjustment phase after the massive disruption from Covid and the exacerbating factors associated with the Ukraine situation and the OPEC price gouge. There was never any justification for the RBA pushing up interest rates. The correct policy response should have been to provide fiscal support for lower-income households to help them cope with the cost of living rises and wait for the adjustment after the disruption to come. The approach taken by the Bank of Japan and the Japanese government was the correct one and that is now clear even though the mainstream economists still cannot see past their textbooks.
Let’s put ourselves in the shoes of a mainstream New Keynesian economist for a moment. We would never want to walk in them for long because our self esteem would plummet as we realised what frauds we were. But suspend judgement for a while because to understand what is wrong with the current domination of macroeconomic policy by interest rate adjustments one has to appreciate the underlying theory that is guiding the central bank policy shifts. The New Keynesian NAIRU concept, which stems from work published in 1975 by Franco Modigliani and Lucas Papademos is pretty straightforward. Accordingly, they define an unemployment rate, above which inflation falls and below which inflation rises. So that unique rate (or range of rates to cater for uncertainty of measurement) is the stable inflation rate – where inflation neither falls or rises. They called it the NIRU (“the noninflationary rate of unemployment”). So if the unemployment rate had been stable for some period, yet inflation was continuously declining, then they would conclude that the stable unemployment rate must be ABOVE the NIRU and vice versa. Apply that logic to Australia at present and you will see why the RBA’s claim that the NAIRU (the modern term for the NIRU) is around 4.5 per cent and this is why they are hiking rates in order to stabilise inflation at the higher unemployment rate. They are frauds.
Modern Monetary Theory (MMT) economists have argued from the outset that using interest rate rises to subdue inflationary pressures may in fact add to those pressures through their impact on business costs. Businesses with outstanding trade credit or overdrafts will use their market power to pass the higher borrowing costs on to consumers. In more recent times, we have seen other mechanisms through which central bank rate hikes actually add to inflation. Regular readers will know that I have been discussing how landlords have been passing on higher mortgage costs in tight rental markets, which then creates a vicious cycle – interest rates up, rental costs up, CPI up because rents are a significant component, inflation rises, interest rates rise. Repeat. The tight rental markets are in part, a consequence of the neoliberal austerity bias, which has seen governments seriously underinvest in social (low income) housing. In recent days, we have witnessed another conflation of neoliberalism and destructive policy insanity. Earlier this month, Australians received messages from the companies that provide them with electricity announcing that the Australian Energy Regulator (AER) had approved price rises of between 19.6 per cent and 24.9 per cent in various East coast states. How did that happen, especially as world coal prices are dropping rapidly and are now below the pre-pandemic levels? And how does the bias towards monetary policy exacerbate this situation?
The question is when is a Labour Party a Labour Party? The answer is: When it is a Labour Party! Which means when it defends workers’ interests against capital and when it defends families against pernicious neoliberal cuts or constraints on welfare. Which means, in turn, that the British Labour Party is a Labour Party in name only and the British people have little to choose from with respect to the two parties vying for government – Tory and Tory-lite! The British Labour Party has been abandoning its traditional role for some time now and while it is true that society and the constraints on government have evolved/changed, some things remain the same in a monetary economy. And that means that the statements from the Labour leader in recent days about fiscal spending austerity and a refusal to reverse some of the most pernicious Tory policies fail to recognise the reality. More spending will be required in the coming years not only to redress the damage done by the years of Tory rule but also to meet the challenges ahead in terms of climate, housing, education, health and more. The real question should be not whether more spending is required but what must accompany that spending by way of extra taxation. In my assessment, the next British government will have to lift taxes to create sufficient fiscal space in order to meet the challenges facing the nation with extra spending. Starmer is clearly not wanting to have that debate, which means the British people are once again being deceived by their political class. Taxes will rise with growth but I doubt that will generate sufficient space for the extra spending that will be required.
Yesterday’s US inflation data from the Bureau of Labor Statistics (July 12, 2023) – Consumer Price Index Summary – June 2023 – shows a further significant drop in the inflation rate as some of the key supply-side drivers continue to abate. The annual inflation rate is now back to 3 per cent and dropping fast. The risk now is that the conduct of the Federal Reserve will drive the US into a deflationary period with rising unemployment. Given that inflation peaked in the third-quarter 2022, that wages growth has been relatively subdued, and inflationary expectations’ survey evidence suggests no-one really thinks the inflation was going to endure, means that the US Federal Reserve’s logic is deeply flawed and not fit for purpose. They have been chasing an obsession that exists in a parallel universe to the real world. The risk is that they will continue to chase that obsession and use the fact that unemployment has still not risen much to claim there has to be higher unemployment. However, hopefully, the 3 per cent inflation rate result yesterday will cut-off any wild claims that they have to get the inflation down more quickly or risk a wages or expectations explosion. All cant of course.
Recently, I wrote about the conditions that dictate what impacts interest rate changes will have on aggregate spending and demand-driven inflation in direction, magnitude and temporality – see RBA governor’s ‘Qu’ils mangent de la brioche’ moments of disdain (June 8, 2023). It is highly likely in many cases, the decisions by central banks to increase interest rates, ostensibly to ‘fight inflation’ actually make inflation worse. More people are starting to understand that point even though central bankers appear to be still talking big about further interest rate rises. But the evidence is mounting against their position and ultimately that evidence is exposing the deep flaws in mainstream macroeconomics. I argue today that the problem is not only that the interest rate hikes can be inflationary but they are also facilitating a major reinforcement of the class divisions in our societies whereby the low income cohorts are transferring massive income benefits to the higher deciles. I also discuss cricket which recently has provided a demonstration of how the class divisions work. Then some music, given it is a Wednesday.