Posted: April 27, 2005

What is the beat up about inflation?

Today the Australian Bureau of Statistics released the Consumer Price Index (CPI) data for the March quarter - 0.7 per cent giving a annual rate of 2.4 per cent. That is, a continuing low inflation environment. Yesterday, the ABS released the Producer Price Index results for the March 2005 quarter. These figures which provide information about movements in domestic production costs. In terms of the what are called final stage commodities, the domestic component rose by only 0.4 per cent (mainly because of rising building construction, beverage and malt manufacturing costs). The import component fell by -2.2. per cent as the exchange rate has strengthened. In fact, only the slight rise in the domestic component of final commodities recorded a positive rise in the March quarter. All other components (Import Final Stage; Domestic and Imports for Intermediate and Preliminary commodities) fell. That is, nothing to worry about in terms of inflation.

So what is this beat up that is going on about the fears of inflation and the claims that skill shortages are so bad that the labour market is about to incinerate and drive inflation out of control? Why did the RBA put interest rates up in March? When inflation was high you would typically be getting the current annual result every quarter. We are far from those days.

So when there is no smoke yet the business lobby and the investment bankers are crying 'fire' you have to start looking for alternative agendas. Perhaps the lure of major industrial relations changes? Perhaps, more free (sorry choking on that) trade deals with countries who exploit their labour force in a variety of illegal ways (in terms of ILO conventions)? Perhaps, a push for more immigration to allow businesses to avoid their responsibilities in terms of training? All of the above!

From where I do my research, there are two fundamental issues facing the Australian economy: (a) there are not enough jobs (or hours of work) to fully employ all those who want to work; (b) the current patterns and modes of production are killing our natural environment. The two are intertwined in the sense that there has to be an increase in public sector employment that moves labour into environmentally protective areas of endeavour. We need more growth to produce jobs but less damaging growth.

With these inflation figures and the fact that the smart money is on an annualised GDP coming in this financial year of around 2 per cent, we can expect a lift in the official unemployment rate of some significance. The labour force is growing at around 1.8 per cent per annum and productivity is probability growing at around 2.2-2.5 per cent (although it will slow as it always does in a downturn contrary to the predictions (requirements) of the orthodox neoclassical model that most economists cannot let go of). If that is so then the GDP growth rate required to hold unemployment constant is something around 4.0 to 4.3 per cent (using Okun type reasoning). This is complicated by the fact that underemployment has been rising as the meaning of a job has changed and is now closer to the one hour a week rather than full-time! But if GDP comes in this year at 2 per cent then the unemployment rate will rise by around 2 per cent and underemployment will worsen.

We could reduce the damage of that type of scenario by having a Job Guarantee in place, so that at least the workers displaced by the slowing private sector could maintain their attachment with the labour market and earn the safety net wage. That is a far better option than an enforced period of unemployment. The Job Guarantee would also allow the most disadvantaged workers in the labour market, who were excluded from work by erroneous macroeconomic policies of the last two federal regimes, to be mobilised and start addressing the environmental problems.

Blog entry posted by bill