Today (October 25, 2023), the Australian Bureau of Statistics released the latest – Consumer Price Index, Australia – for the September-quarter 2023. The data showed a slight uptick in the quarterly rate of inflation with the CPI rising by 1.2 per cent (up 0.4 points), largely due to petrol price rises and rental increases. The latter is, in part, driven by the previous RBA interest rate hikes – so monetary policy causing inflation rather than reducing it. The annual inflation rate, however, was significantly lower again in the September-quarter as the supply-side drivers abate – down to 5.4 per cent from 6.1 per cent in the June-quarter. While the RBA has been threatening further rate hikes if the new data showed an increase in the inflation rate, there is nothing in this quarterly release that would justify that. The fuel prices are not sensitive to domestic monetary policy and further rate hikes will make the rental situation worse.

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.

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?

Today (April 26, 2023), the Australian Bureau of Statistics released the latest – Consumer Price Index, Australia – for the March-quarter 2023. It showed that the CPI rose 1.4 per cent in the quarter (down 0.4 points) and over the 12 months by 7 per cent (down 0.8 points). The monthly data, also released today (which I do not analyse here) shows inflation dropping from 7.4 per cent in January to 6.8 per cent in February to 6.3 per cent in March. Significant downward trend as the supply factors abate. Taken together we conclude that the peak has now passed, which is consistent with my assessment that this would be a transient, supply-driven event. There are no wage pressures and inflationary expectations are in decline or steady. The laughable thing is that as the rate falls, the mainstream narrative, which continues to push for higher interest rates, has shifted from a focus on the inflation rate itself to the claim that it is now not falling fast enough. The claimed fears are now that the longer it remains at elevated levels the more chance there will be of a wage-price spiral breaking out and/or accelerating (un-anchored) expectations. Neither are likely given the situation before us and that leads to the conclusion that these interest rate boosters are just exuding hot air as usual. The major sources of price increases are temporary and in the March-quarter are the direct result of discretionary government administrative arrangements (indexation arrangements etc), which could easily be waived this year. The correct policy response should be to provide fiscal support for lower-income households to help them cope with the cost of living rises at present. Increasing interest rates again will not solve the problem that is already abating.

Remember all the hype from central bankers last year and earlier this year about how they had to get ‘ahead of the curve’ with their interest rate hikes just in case wage demands escalated and inflationary expectatinos became ‘unanchored’. Over the last 18 months, I consistently noted in various blog posts that this was all a ruse to create a smokescreen to justify the unjustifiable rate rises – given that the inflationary pressures were almost all coming from the supply side and those forces were temporary and abating. Well now, the mainstream, having pushed for the rate rises and got their way are now backtracking to maintain their credibility by claiming there are no wage-price dynamics in sight. It is a dystopia.

I have read an interesting reports in the last months that demonstrate there is a shift in thinking about inflation – away from the tired narratives that attempt to implicate excessive government spending, poorly contrived monetary policies (particularly quantitative easing) or drag in the usual suspect – excessive wage demands from workers. All of the usual narratives are very convenient frames in which those with economic power can extract more real income at the expense of the rest of us, who have little economic power. At least, we have been indocrinated to think we have no power. But, of course, if we could overthrow the whole system of capital domination if we were organised enough but that is another story again. Back to the inflation framing. While it was possible to argue that distributional struggle between workers (organised into powerful unions) and corporations (with obvious price setting power in less than competitive industries) was instrumental in propagating the original OPEC oil shock in 1973 into a drawn out inflationary episode, such a narrative falls short in 2022-23. The workers are largely disorganised and compliant now. The new thinking is starting to focus on the role of corporations – one term that is now being used is ‘greedflation’ – to describe this new era of profit gouging and its impact on the inflation trajectory. That shift in focus is warranted and welcome because it highlights the imbalances in the capitalist system and just another way in which it is prone to crises.