Standby for a good news leak from what will be in tomorrow night’s Budget speech — Dr Jim Chalmers will wield a price-killing sword, which should help the RBA’s Dr Phil Lowe slay the inflation dragon. Yep, I know it’s a tad dramatic and worthy of King Charles the first (who actually was executed in 1625!) when they might still have believed in dragons!
Away from history and back to the future, and according to the AFR’s inside man in the Canberra Press gallery, Dr Jim is poised to announce $14.6 billion worth of cost-of-living support measures that will bring prices down.
The centrepiece will be energy bill discounts to the tune of $500 targeted at 5.5 million low-income households. And a million small businesses are also set to feel some Budget night relief from exorbitant energy outlays.
By the way, one-third of our inflation has been caused by higher energy prices, which have not been helped by Putin’s war and the impacts of pandemic lockdowns on the supply chain, which are starting to be less of an issue.
This move by Labor to help reduce energy-driven inflation actually makes sense: a government hellbent on closing down old sources of energy to encourage new world and (currently) more costly power sources, should try and help those who find higher power bills hard to live with.
So, what can be expected to help Aussies cope and live with this more costly Australia? Here’s a start:
- Higher welfare payments for the unemployed and single parents.
- $3 billion for the $500 energy bill discounts, which will differ in each state because the price rises haven’t been the same nationally.
- Cheaper prescription drugs at a cost of $1.2 billion.
- A package to provide low-income homes.
- Incentives for businesses to switch from gas to electric appliances.
- An already announced $5 billion plus allotment of money to reduce child-care fees.
Are most of these price-reducing measures a good move to reduce inflation? “Energy prices are contributing to about one third of inflation, which is running at 7 per cent, and Treasury has advised the government that lowering bills by paying retailers to pass on a discount will lower CPI,” Phil Coorey of the AFR informs us.
But wait there’s more — lower inflation reduces the likelihood for too many more interest rate rises, and might even help the RBA to stop this madness.
The irony is not lost on even non-economists that the measure to reduce inflation i.e., raising interest rates actually adds to inflation!
If you Google, “do rising interest rates add to inflation”, you get the spiel that they add to savings, depress demand to spend and prices fall but the word “eventually” should be thrown in.
The short-term impact has little impact on spending. That’s why we’ve seen 11 rises since May last year! Rising rates also hit rents, building costs, other product costs as well as wages and what contractors charge. Rising interest rates add to inflation, so this move by Dr Jim is sensible and well-timed with inflation on the slide.
If you don’t believe me, try accepting this from the RBA itself: “Since the start of 2022, the strong growth in advertised rents has started to be reflected in higher rents for all leases, as measured by the CPI. The increase in CPI rents of 4 per cent over 2022 was the strongest in 10 years.”
