Australia has a dirty little secret.
asserted
Australia → have → secret
Despite four Reserve Bank interest rate hikes, supposed fiscal restraint, and a recent small improvement in productivity, inflation is rising.
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inflation → suppose → productivity
At face value it makes no sense.
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it → make → sense
Millions of households continue to struggle to make ends meet.
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ends → continue → households
Dig a little deeper though and the logic of why the country continues to struggle with inflation is painfully simple.
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country → dig → inflation
There appears to be only one solution: lower demand to the point where the economy breaks.
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economy → appear → point
Following its most recent decision to raise the cash rate, the RBA's statement began by saying that inflation was already too high.
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inflation → follow → rate
It went on to say "… and some of the upside risks flagged in August are materialising".
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some → go → August
"The conflict in the Middle East has broadened and global energy prices are now much higher than had been assumed in the August forecasts," it wrote.
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it → broaden → forecasts
"AI-related demand is driving rapid growth in global prices for technology-related goods.
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demand → relate → goods
Put simply, the economy is struggling to supply the goods and services to meet current demand, and higher energy prices add to the cost-of-living pain.
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prices → Put → pain
The solution then is to boost the nation's ability to meet demand.
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solution → boost → demand
Failing that, demand needs to come down.
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demand → fail → that
Inflation slipping away from us
There was better news on the supply front delivered in the most recent national accounts, where GDP per hour worked (one measure of productivity) moved out of negative territory, albeit to zero.
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GDP → slip → zero
But over the year, it sits at -0.2 per cent.
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it → sit → cent
Lacklustre productivity means the only option that remains, in the near term, is for demand to fall.
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demand → mean → term
Federal Treasurer Jim Chalmers said on Wednesday the government was doing its bit.
"
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government → say → bit
We've been able to manage the budget in a much more responsible way than it was being managed by our predecessors …
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it → manage → predecessors
we accept our part in the fight against inflation," he said.
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he → accept → inflation
And while private (or business) investment did not contribute to GDP in the June quarter, it was driven by household consumption (+0.2 percentage points).
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it → contribute → consumption
It has put a target on the back of households as the ones to blame for the "excess" demand.
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It → put → demand
Iran war making inflation sticky
And this is the critical point.
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this → make → ?
The Iran war is squeezing oil supplies and forcing fuel prices higher.
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war → squeeze → prices
The Reserve Bank says its liaison program shows businesses are looking to pass increased costs of production into customers.
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businesses → say → customers
Worse still, as RBA deputy governor Andrew Hauser said this week, is that businesses don't really see an end in sight to elevated costs.
"
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see → say → costs
There's just some sign that some companies might be thinking, you know what, maybe prices aren't going all the way back.
uncertain
prices → be → what
And if they're not, we're going to have to take that into account with the pricing decisions."
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we → go → decisions
This paves the way for his "nightmare" central banker scenario of unanchored inflation expectations.
Sledgehammer to demand
One way to put this vicious cycle into reverse is to ensure consumers do not have money in their pockets to spend, or at least not as much money.
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consumers → pave → pockets
So rather than supply not meeting demand, demand is unable to meet supply.
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demand → meet → supply
Economic theory tells you prices then stop rising and actually fall.
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prices → tell → you
Because business owners are forced to lower their prices to attract customers back to their stores.
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owners → force → stores
To be fair, the Reserve Bank has tried to set this path in motion, but its "cautious" approach has proved too cautious.
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approach → try → motion
But if households spend less to the point that the corner store does not replace a leaving staff member, the person who would otherwise have landed that job purchases fewer items and saves more … and so on.
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who → spend → more
This environment has the potential, former NAB chief economist Alan Oster says, so push the unemployment rate beyond 5 per cent.
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Oster → have → cent
But interest rates need to rise higher for this to occur.
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this → need → ?
"My worst-case scenario would be two or three further rate rises, which I think would clearly cause you recession,"Mr Oster said.
"
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Oster → think → ?
And I think you're probably going to struggle anyway.
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you → think → ?
"Certainly, I'd expect, I'll wait until they've actually done it before I review my forecast, but I would expect to see lower growth and higher levels of unemployment and probably unemployment with the five in front of it
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I → expect → it
," he said.
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he → say → ?
So will rates keep rising?
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rates → keep → ?
…and 9 more, not listed.
The Aporia
