It’s hardly news that inflation is proving sticky. Nor is it news the Reserve Bank of Australia (RBA) has long been spinning a dangerous and deeply confused narrative about its war on inflation. The latter simply hasn’t received much in the way of focused attention.
Since May last year, the central bank has raised interest rates sharply and in quick succession, crushing thousands of low- and middle-income households in the process and pushing many more struggling families and individuals to the brink.
The accepted wisdom is that this is not only an orthodox approach to inflation demanded by both the circumstances and the national interest, but one that, by design, unapologetically exacts a high human cost.
“It’s really tough, I understand that. I hear those stories [of personal hardship] with a very heavy heart,” RBA governor Philip Lowe said in Senate estimates a few weeks ago.
But, he added, “many have forgotten the really serious damage [untrammelled inflation] does to people, livelihoods and the functioning of the economy if it persists. It leads to higher interest rates and more unemployment.
“People are free to express their opinion [but] it is the job of the central bank to control inflation.”
Raising interest rates is, of course, the one and only tool the RBA has at its disposal to influence inflation, and it’s one predicated on stunting job growth. But it’s also one wholly, if not exclusively, suited to demand-driven inflation.
The hope is the price of things will come down if people are forced to clamp down on their spending and economic conditions deteriorate. In this way, the consequences carried by higher interest rates are supposed to inspire some level of fear in employees by hanging the spectre of unemployment over their heads like the sword of Damocles, frightening them into accepting real wage cuts as economically uncertain times roll on. The desired result is suppressed wage growth, lowered consumer demand and, eventually, controlled inflation, or so the thinking goes.
The obvious problem, however, is that the inflation of today, for the most part, isn’t demand-driven, which is what renders the RBA’s undisguised penchant for raising interest rates in recent times at best perplexing and, at worst, dangerous.
Perplexing because, on the central bank’s own analysis, there’s nothing to indicate existing inflationary pressures are being driven solely or even primarily by demand as opposed to supply-side problems, the latter of which are the result of things it can’t plausibly influence, much less control. Perplexing, too, because average real wage growth at the time of the first interest rate hike was, as it is now, utterly non-existent. And dangerous, because the RBA’s preoccupation with hitting households over and over with higher interest rates is itself fuelling inflation as corporations exploit its rhetoric to jack up their profits, risking — in the eyes of some leading economists — a recession in the long run.
All of which brings to the fore the frankly bizarre narrative the RBA is selling Australians to lend legitimacy to what it claims is a war on inflation, but could – from this vantage point – easily be construed as a war against ordinary households.
For one thing, the RBA has continually lectured unions and employees on wages, telling them of the need to be “flexible”, all the while conceding existing demand and wage growth, such as it is, has little to do with soaring inflation. Still, it says, it can’t rule out the very remote possibility the economy might witness excessive wage growth later on. And so, promises Lowe, expect more interest rate rises.
For another, it accepts in this connection that the overwhelming causes of inflation owe to supply-side disruptions, such as the war in Ukraine, the pandemic and natural disasters, that it can’t do anything about. And yet it insists that it remains the “job of the Reserve Bank to control inflation”. And so, promises Lowe, expect more interest rate rises.
And, finally, while the central bank has acknowledged that continually pulling the lever on interest rates could ultimately prove misguided and deliberately set us on the path of a recession, Lowe tells us not to worry: “smashing Australia into a recession is not our intention”.
In sum, the RBA’s full, incoherent story — in all its glory — runs like this: in its view, inflation is mainly a supply-side problem that it can’t fix but will furiously pretend it can fix; it’s not really caused by the labour market at all but could be down the track; and we’ll hopefully not end up in a recession, but hope’s never a sure thing — just remember the time we told you the cash rate would remain at 0.1% until 2024.
Except, of course, that’s not the full story. Tellingly, the only thing omitted from this confused and misleading narrative was any reflection of the considerable role excessive corporate profits are playing in fuelling inflation, for which the evidence is vast and growing.
According to recent analysis of the latest GDP data, nearly 70% of inflation sitting about the RBA’s ideal target range of 2.5% today can be sheeted home to the extraordinary profits banked by corporations.
The same analysis revealed businesses had increased prices by some $160 billion a year over and above taxes, labour and other costs as of September last year. Absent those extraordinary profits, it says, it’s unlikely the RBA would ever have had a valid reason to volley Australians with nine interest rate hikes in 10 months.
Among the corporate winners, it bears mentioning, are Australia’s big four banks, with the Commonwealth Bank alone recording half-yearly earnings to December of $5.15 billion and NAB some $2.15 billion. Notably, both these banks in recent weeks have acknowledged that their inflated bottom lines have directly benefited from the RBA’s “interest rate environment”.
Then of course there’s Australia’s two biggest supermarkets, Coles and Woolworths, which respectively banked half-yearly profits of $643 million and $907 million, and Qantas — the largest recipient of corporate welfare in Australian history. On Thursday, the airline announced a record $1.43 billion half-yearly profit, though it denied this had anything to do with its $2 billion taxpayer handout during the pandemic, much less the economy’s wider inflationary pressures.
Lowe, for his part, has acknowledged the banks are profitable, but told Senate estimates this is “a positive for the country”.
“I know it’s hard for people to accept when they are suffering problems with their personal finances,” he said, “but the country is better off from having strong, resilient, effective banks.”
In reality, what’s truly difficult for people to countenance is the notion that their declining real wages are to blame for rising prices when the true culprit is largely the corporate profiteering enabled and facilitated by the RBA itself in a highly uncompetitive market.
As Ross Gittins recently put it: “Join the dots, and you realise the RBA’s plan to get inflation down quickly involves allowing a transfer of many billions from the pockets of households to the profits of big business.”
“The RBA’s unspoken game plan is to squeeze households until demand for goods and services has weakened to the point where big business decides that raising its prices to increase its profits would cost it so many sales that it would be left worse off.”
Naturally, the revelation of Lowe’s “cosy lunch” with bankers just two days after the RBA lifted the cash rate — which coincided with a sell-off in bond futures contracts — only adds weight to this perception.
On balance, the most charitable reading of the RBA’s actions, as the nation barrels towards what now seems like a predictable downturn, is that it’s trying to kill domestic demand just enough to reduce excess inflation but not so much that the economy crashes and burns. But given we can presume the RBA is fully cognisant of the true causes of inflation, this is tantamount to it setting fire to a forest during a drought, screaming about the need to put it out and then throwing petrol over it and hoping no one notices.
The less charitable reading is that the RBA knows it’s institutionally incompetent to deal with existing inflation, but nevertheless sees it as an opportunity to further entrench inequalities by enriching its corporate friends at the expense of ordinary Australians. To that end, it’s necessary for the RBA to insist that it is primarily it — and not so much government through various well-directed fiscal interventions, such as a super-profits tax, price controls or subsidies — which can solve the inflation problem.
Whatever its true motivations, the institutional failures here are systemic, and the entire rationale of the RBA is on the line. It’s true its 1959 mandate — to ensure economic stability and to contribute to the “economic prosperity and welfare of the people” — was written for a less volatile world. But it’s equally true the RBA has long forgotten what it means to protect the latter.
So, as a recession looms, let it not be lost on anyone that the downturn will principally owe to a series of decisions made by a handful of unelected officials at Martin Place, Sydney.
Little wonder one of the first acts of federal treasurer Jim Chalmers last year was to order a review into the RBA.
