The frustration of the Reserve Bank is palpable. It’s deeply annoyed at the way inflation is proving to be resistant to its punitive series of interest rate rises, which have smashed economic growth and forced most consumers to hunker down and run down any pandemic-era savings they might have had left to fund ever-diminishing demand.
It’s almost as if the bank was determined to lift interest rates yesterday and prepared a governor’s statement accordingly, only for the board to shy away at the last moment.
That statement listed the usual suspects the RBA likes to blame for inflation: “excess demand”, lazy workers (“Wages growth appears to have peaked but is still above the level that can be sustained given trend productivity growth”) and, in the August Statement on Monetary Policy, government spending: “The stronger outlook for public demand reflects ongoing spending and recent announcements by federal and state and territory governments.”
That had inflation hawks and neoliberals saying it was all Labor’s fault (ironic, given it’s the only government to produce back-to-back budget surpluses since the early part of the century).
Problem is, the RBA is all over the place on the role of governments in inflation. For instance, in June governor Michelle Bullock made it clear that she would ignore government efforts to reduce headline CPI via methods such as the power bill rebates and increases to Commonwealth rent assistance announced in the May budget and, at the state level, initiatives like the Queensland government reducing public transport fares. Why? Bullock: “we try to look through things that are one-off and are going to be reversed.”
That’s had the endorsement of the economic commentariat and hardline “liquidate them all” economists who think government subsidies are a fundamentally illegitimate way to reduce inflation.
The August Statement demonstrates the impact of those measures from the federal and state governments: headline inflation is expected to decrease to 3% by December and 2.8% by June next year — within the RBA’s target band — but the bank’s preferred measure, the trimmed mean, will still be above 3%. The RBA thinks headline inflation will surge back up again to 3.7% after the end of the current financial year.
So what consumers will actually be paying is irrelevant — those prices for things like rent and power are just artificial, illegitimate government-subsidised prices, not the real prices of the trimmed mean. Even though you can’t walk into a supermarket and demand to pay in trimmed mean dollars.
But, curiously, it’s a different story when it comes to the other side of that particular coin: the taxes and charges that governments impose on consumers. The RBA treats those as a real part of inflation — even when they generate an indexation Ponzi scheme like we’re seeing at the moment with CPI-indexed excise and taxes that go up because CPI went up in previous quarters, thereby fueling further CPI rises: the petrol and diesel excise, tertiary education charges, and tobacco and alcohol taxes. Individual federal agencies also index their charges: ASIC puts its fees up on July 1 as does the Tax Office for fees for foreign investment applications which include property and housing.
At the state level, indexation also hits hard: road tolls are indexed to CPI (in NSW and Victoria they go up by at least 4% regardless). Stamp and transfer duty thresholds are indexed. In Victoria — Australia’s most overtaxed state — fines and other imposts (Victoria has the worst fines regime anywhere in the country) are indexed, as are health services.
Some of these Ponzi-style inflators are ones you rarely encounter; others hit you every time you fill your car up or have a drink. And they feed into the costs of business across the country as well.
To be consistent on the treatment of government impacts on CPI, the RBA — perhaps working with the Australian Bureau of Statistics — should use a measure of inflation that strips out the impact of self-reinforcing public sector indexation rises — or includes measures designed to reduce CPI. At the moment the RBA happily sees one but “looks through” the other.
But then that would require some deeper thinking about what has really driven inflation in Australia over the last two years. How much of it was the usual neoliberal suspects that the RBA has been blaming: households spending too much and lazy workers getting pay rises — and how much of it is due to factors beyond the control of consumers, no matter how many times the RBA lifts rates.
Insanity is doing the same thing over and over and expecting different results, the cliché goes. At some point, the RBA might wonder, if inflation hasn’t come down despite it repeatedly lifting interest rates, whether it should keep doing the same thing over and over.
