The unique Australian inflationary cocktail embraced three significant twists in an action-packed weekend.
What makes Australia unique is that we have a new government spruiking wage rises and big spending that is backed by the Fair Work authority.
Partly in response, the Reserve Bank has raised interest rates but is forecasting price increases of around 7 per cent before the year is out.
My retail friends at the coalface say that at least in the parts of Australia where the sun was shining over the weekend, consumers flocked to many big shopping centres. They have received the message from the Reserve Bank that prices were going to climb and are confident that they would receive the so-called “Albanese wage rise” of 5 per cent. The share market sell-off had no impact. In some shopping centres spending was frenetic.
But there was a reverse twist.
In the days leading up to the weekend, major retailers got a clear sniff from some of the big transport operators that they were bleeding because their costs were exploding and profits were evaporating. In the pipeline were dramatic price increases that would vary between 6 to 8 per cent but in the broad would be fulfil the 7 per cent forecast of Reserve Bank Governor Philip Lowe
If, as is likely, the retail expectation is correct then there will be vigorous argument between big retailers and big transport. If the transport prices rise by around 7 per cent then Australia is well on the way to fulfilling the Lowe forecast because the cost of transport impacts the entire nation. And still coming down the pipeline is the “Albanese wage rise” set for the early months of 2022-23.
But, as retailers tell me, there was a sting in some of the messages being received from the big transport companies.
In the last couple of years the main object of the large transport operators has been to supply as much capacity as was possible given all the hazards that were encountered. Inevitably along with fuel and other outside factors that has boosted operating costs, while demand was roaring it didn’t seem to matter.
But in recent times there’s been a clear slackening in demand. The message from the transport companies is that the slowdown is not severe but it is noticeable and combined with higher costs is putting some companies close to being in the red so they have to raise prices.
The experience of the transport sector indicates that industry overall does not believe the sudden surge of retail demand foreshadows what is ahead so companies are adjusting activities accordingly.
As we have seen in America, on the frontline when interest rates rise is residential housing. The preliminary Sydney weekend auction clearance rate was around 55.4 per cent - the lowest in two years. Melbourne did better and with other cities enabled a 57.8 per cent national clearance rate which was the lowest since August.
When the Reserve Bank board meets next month they will be presented with mountains of useless and out of date statistics prepared by Reserve Bank management bunkered in Martin Place Sydney.
Reserve Bank non executive directors have a national responsibility to personally get on the phone and ring the chief executives of both family businesses and large corporates to discover just how the Australian inflationary forces are playing out.
If the cocktail I identified at the weekend continues in the next couple of weeks, then not only will Philip Lowe be right about 7 per cent inflation but that will merely be a starting point as we head towards double figures.
I sympathise with the Reserve Bank because they cannot control supply forces like energy prices and Australians have voted into power a high spending and high wage government. The central bank has only one weapon to control inflation, albeit brutal – using interest rates to reduce demand.
The Reserve Bank board needs to include people who are managing what is happening on the front line.
We have a talented group on the board who are very capable of finding out what is actually happening rather than rely on the people in the Martin Place bunker who can’t tell them what is happening now until the end of the year. The central bank’s out of date statistics were big contributors to its recent fundamental errors.
If the phone calls show that the last weekend’s inflationary cocktail has gathered pace then it is clear that interest rates are going to need to rise a lot more.
Rather than nibble at the task, maybe the next rate increase needs to be much greater than 0.75 per cent.
If the transport companies’ volume fell 20 per cent, then big price rises would move off the agenda, labour shortages would reduce and “non supply” inflation would come under control. But the short term impact would be brutal. In companies and economies when something seriously goes wrong you need to tackle a problem head on and not dribble out the remedy.
If the Reserve Bank directors check with corporate executives in the US (and not the Federal Reserve) they will discover that retail sales are indeed starting to slip, although the well off community is still spending but it is directing more of it away from goods into services led by travel.
Footnote: Full marks to Treasurer Jim Chalmers for extending the Independent panel Reserve Bank inquiry into the board structure.
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