Here’s how to curb inflation without big rate hikes: Robert Gottliebsen

There are many actions authorties can take to tame inflation with massive rate hikes. The good news is that two of the steps were done last week.

How can Australia curb inflation without substantial increases in interest rates?

I believe that there are a series of steps we can take that will help us to avoid the catastrophe we face if there is no alternative but to increase interest rates markedly. The good news is that two of the steps were taken this week.

In the US, the impact of higher interest rates is not as severe as Australia because their housing loans have fixed interest rates that extend for decades. Australian home loan interest rates are either flexible or carry relatively short fixed terms.

In looking for solutions, it is important to recognise why inflation in Australia is set to rise further. As I pointed out earlier this week, importers have been notified that the cost of Chinese goods will rise sharply later this year; the full impact of high oil prices is only just starting to come through; food prices are rising rapidly and the cost of constructing dwellings goes up every day as material prices increase.

But, unlike previous inflationary bouts, wages are “under control”, because, partly as a result of Covid, employers and contractors can’t afford to pay more for unskilled and semi-skilled labour. This has social consequences when the cost of living is rising.

The cost of skilled labour has risen sharply but the vast army of unskilled and semi-skilled workers is simply not being paid substantial amounts of extra money. When labour is in short supply many businesses shut rather than offering greater sums to attract workers. Increased supermarket bills are creating considerable personal anguish but that anguish will turn into deep despair if interest rates are increased sharply and flow into mortgage house repayments.

Accordingly, stopping inflation not caused by a wage breakout via big interest rate hikes will almost certainly send the country into recession.

The Commonwealth Bank’s top interest rate strategist, Martin Whetton explained this week that because of Australia’s high community borrowing interest rates rises will impact spending at much lower levels than previous cycles.

There is no doubt that given the inflation rate increases that are looming, there will be rate rises.

But the mere whiff of interest rate rises is already impacting consumer confidence. That impact will be so much greater once interest rate rises start.

So how do we tackle inflation without the severe economic impact that much higher rates will create? The first step in this process has come from an unlikely source – the High Court – which applied the common law principles behind the Federal Government’s 2006 contract legislation. True independent contracting where the persons under contract can work at the times that suit them and for different organisations can boost base incomes and has been a valuable tool lowering the social impact of wage restraint. In the looming political debate on this issue, it will become clear how unskilled Australians use independent contracting to increase their base income.

High skilled people such as IT workers make sure that their independent contracts are highly rewarding. Properly established contract relationships provide great flexibility of labour and now that they have been endorsed by the High Court, Australia has the opportunity to increase labour force efficiency which will curb inflation and interest rates.

A flexible but well rewarded labour force also makes it easier for Australia to become less reliant on imported goods.

Secondly, the cost involved in small genuine contracts is currently boosted by the horrendous unfair contract practices of many large enterprises. One of the stunts that is proving so costly is that all liabilities end up with a small contractor irrespective of what exactly happened. That then makes insurance very costly.

The long awaited unfair contracts legislation appears set to go before the parliament and looks like being supported by both parties despite opposition from bad industry bodies whose members believe they should have a legislated right to hit small enterprises.

Then comes the gorilla in the room – the exorbitant cost of housing. The Housing Industry Association estimates that about half the cost of a house and land package is state and local government charges plus bureaucratic waste. That impacts both house and land developments plus apartments and puts an enormous burden on society. Debt ridden state governments have no choice but to continue to impose GST and some form of stamp duty on property transactions.

If we take those taxes as a necessary evil, then we can still reduce costs by eliminating the mountains of bureaucracy and bodies that make any development a costly long drawn out process irrespective of its merits.

A simple system is needed and regulations imposed by local and state governments need to be costed. A number of state governments are waking up to the fact that their own actions are forcing them to erect social housing, because the costs of their delays and uncertainties make it impossible for people to buy dwellings at a price they can afford.

There will be many other actions we can take to restrain inflation without wrecking the economy via much higher interest rates.