Will we see a series of rate increases to ‘burn, baby, burn’ inflation out of the economy? Is there a recession “we didn’t have to have” on the cards? Who’s to blame for all this? Read on….
After the country gave Prime Minister Anthony Albanese a ringing endorsement at last year’s election, voters now blame him for the high cost of living. And the fingers of blame look set to multiply after 2.30 pm today, with the Reserve Bank expected to raise rates to get on top of inflation that has defied the central banks efforts to get it back into the 2-3% band.
The current inflation rate is 3.8%. Six months ago, it was 1.9%. And the Iran war could push it into the 4% plus band. Financial markets think there’s a 75% chance of a cash rate rise of 0.25% today, which would take this benchmark for nearly all rates to 4.1%.
So, let’s look at the blame game and see ‘who’ or ‘what’ Australians blame, and compare this result to what an economist like me would say, if interviewed by Peter Stefanovic on Sky News or Karl Stefanovic on Nine’s Today show. Interestingly, both Stefanovics did just that on their shows over the past week, when the oil price topped US$100 a barrel.
The SMH’s Shane Wright has looked at a Resolve Political Monitor that found 40% of Aussies blame the Albanese Government. Here’s the list of who’s being blamed:
- The Federal Government 40%.
- Global factors 17%.
- State & Territory Governments 10%.
- Businesses 6%.
- The RBA 6%.
- Consumers 3%.
- Unsure 17%.
Now here’s my list of ‘who’ and ‘what’ to blame for this persistent inflation:
- The Albanese Government with its commitment to being very green, which has led to higher power prices. Then there were tax cuts to bolster the economy before an election. And there have been big pay rises for public servants, as well as an expansion of that service. There was a failure to police the NDIS, which has helped blow out the deficit. And finally, this Labor government has been very supportive of better pay and conditions for workers without a productivity trade-off, which is socially good for workers but bad for inflation.
- The Reserve Bank, which cut interest rates too early and had no idea of how the budget deficit was blowing out and feeding into inflation.
- Those Australian consumers who own their home and have no debt and have been virtually untouched by the RBA’s rate rises. These people have been willing to play ball and pay higher prices with businesses that are able to raise prices because of their virtual monopoly status, such as Qantas, power companies, big banks, big supermarkets, US tech companies, etc.
- Younger Australians addicted to technology and socialising, who have become victims of businesses that overcharge for products and services that these younger generations can’t live without, such as iPhones and other tech products and services.
- Union leaders who aren’t really committed to assisting in raising the countries productivity. Their commitment to the work-from-home trend is a case in point.
- Trump’s Iran war, which has hit petrol prices. But this should be a short-lived, future inflation issue.
And it’s on this final point that we see one of the greatest problems that the Federal Government and Labor state governments have contributed to over the past few years of their political domination. They have pursued good social goals but have ignored the economic consequences of their actions.
Wright talked to respected HSBC chief economist, Paul Bloxham, who thinks the RBA might have to go very hard on rate rises to tame the inflation dragon. “Australia’s economy needs a downturn to deliver the necessary disinflation to get inflation back to the RBA’s 2.5 per cent target. This is the tough, hard and unfortunate reality,” he said. “The RBA may now have to be clear that a recession may be what is needed to get inflation sustainably back to target”.
The price of Treasurer Jim Chalmers’ nice guy policies for socially supportive reasons and a union group not prepared to embrace productivity, is an economy with high inflation. And now economists like Bloxham are saying the RBA might have to burn inflation out by creating a recession via high interest rates. This takes me back to a press conference in late 1990 when Treasurer Paul Keating had a recession on his watch. He famously said: “This is the recession we had to have.” Previously he had talked about how he could burn inflation out of the economy, but it would mean a recession. Recessions and high unemployment then cuts spending, reduces prices and changes attitudes. It can also change governments!
Good governments can contain inflation, sustain economic growth and keep unemployment relatively low. We actually went from 1991 to 2020 without a recession and that was brought on by Covid and the lockdown period. We went 20 years without a recession, which no modern economy has achieved but now we might have to cop a ‘burn, baby, burn’ economic fire sale to kill inflation.
The only plus from a recession is that it does change attitudes and prepares the population for necessary changes. However, I’d argue that the possible recession ahead is “the recession we didn’t have to have”. I blame the two bodies charged with the job to keep inflation down and jobs up — the Federal Government and the RBA.
As the Albanese Government injected demand into the economy with their soft, nice guy policies, the RBA should have been taking it away. Clearly, their three rate cuts in 2025 were misguided, given what we’re seeing now.
Albanese had no ringing endorsement…..over 60% of voters did not support him…only his deals with Greens got him the job.