According to surveys of voters going into the election campaign, one of the factors that most concerns people is the rising cost of living. The most recent figure for the December quarter showed the consumer price index growing at an annual rate of 3.5 per cent.
Compared with several other countries, this figure is quite modest.
The most recent data for the US indicated an annual inflation rate of 8.5 per cent, a 40-year high in that country. In Britain, the most recent figure was 7 per cent and in Canada it was 5.7 per cent. Our cousins over the ditch experienced an inflation figure of close to 6 per cent in the year ending in last year’s December quarter, the highest there for three decades.
Most analysts here expect the CPI to increase even faster when the next figure is released towards the end of this month. Higher petrol and food prices and rapidly rising rents point to the CPI rising above the Reserve Bank’s comfort range of 2 per cent to 3 per cent, using its preferred adjusted figure.
The reality is only older people remember high inflation. Since 1990, annual inflation has averaged 2.5 per cent, a marked contrast with some figures recorded in the 1970s and ’80s. A combination of cheap goods from China, new technologies and inflation-targeting by independent central banks contributed to these years of low inflation.
What explains this unwelcome return of inflation? For most of last year, the common view was that any inflationary pressures were temporary, arising from supply-side blockages caused by Covid-related restrictions. The expectation was these pressures would subside as restrictions were lifted and the normal flow of goods and services resumed. Some alternative viewpoints have emerged more recently, including the inflationary effects of governments’ budgetary measures to deal with Covid (think the provision of substantial transfers to the population and ramped-up spending on infrastructure) as well as excessively loose monetary policy. On this last point, the extraordinarily low cash rates implemented by central banks in the face of low and falling unemployment are likely to have contributed to rising inflation.
The war in Ukraine has added to inflationary pressures as sanctions against Russia disrupted international commodity markets. Mind you, some of the trends in higher oil, gas and fertiliser prices were apparent before the invasion. China’s decision to ban urea exports predated the war.
The power of large companies to lift prices is also mentioned as contributing to inflation, particularly in the US. Why these companies have waited until now to raise prices is not entirely clear, but there is certainly a degree of political attractiveness to this conjecture, including the possible solution of antitrust measures.
More generally, it is true many firms, big and small, have begun to discover their power to increase prices of goods and services, a power many did not have during the years of low recorded inflation.
The key political question in Australia is: what can the parties promise to voters by way of relief to cost-of-living pressures? And how believable are these pledges?
The Coalition led the charge at budget time by providing a cash handout of $250 to most recipients of government benefits as well as tax relief for many low and middle-income earners. The decision to cut the fuel excise by 22c for a six-month period was in response to the spike in oil prices. As luck would have it, the effect of the decision has been highly visible and large, in part because the world oil price has eased back somewhat. No longer is petrol being priced above $2 a litre, a political win for the government.
Having said this, these measures have bipartisan support. In respect of the excise cut, there is the tricky issue of when the six-month period is over. Depending on where the world oil price is, it could prove difficult to reimpose the full amount. This decision has to be weighed against the ongoing fiscal cost of the lower excise rate – around $3bn for six months.
Notwithstanding these measures, it seems likely many voters still will be smarting at rising cost-of-living pressures, particularly the price of food and other essentials. For all the talk of wages growth rising soon, the evidence is that wages have been growing more slowly than prices. The wage price index rose by 2.5 per cent across the year ending in the December quarter of last year.
Even with recent developments on the inflation front, the lull before the storm best characterises the Australian situation. Electricity prices have fallen in recent times, in sharp contrast with several other countries.
Inflation is increasing and, with it, inflationary expectations. The likelihood is the Reserve Bank will begin the process of lifting the cash rate from June, leading to higher mortgage rates. Many mortgage holders have never experienced an increase in the rate. Some estimates put the additional costs of higher rates for a typically indebted household at between $1000 and $1500 a month.
Something that concerns the central bank is that once inflation takes hold, there are self-perpetuating elements that can lead to even higher inflation. After all, there are elements of indexation attached to most government payments. Workers, aided by trade unions, are likely to seek wage rises to compensate for past price increases as well as anticipated future ones. Falling living standards are never the highway to political popularity. The Morrison government may escape this opprobrium because of budget handouts, at least until election day. Low unemployment also helps, but difficult times lie ahead if overseas developments are a guide.
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