Controlling inflation will ultimately protect jobs

This year’s review into the Reserve Bank of Australia for the Albanese government emphasised that the bank must give “equal consideration” to achieving full employment and controlling inflation when making future ­interest rate calls. Full employment, as well as currency stability, and the welfare and prosperity of the nation are already central to RBA monetary policy. And as bank deputy governor Michele Bullock made clear in a speech in Newcastle on Tuesday, the RBA had been willing to accept a more gradual return to its inflation target than many other central banks to preserve employment gains. “Our most recent forecasts have inflation returning to target by mid-2025, while employment growth slows but does not contract,” she said. “The unemployment rate is expected to rise to 4.5 per cent by late 2024.” After credible projections in early 2020 that unemployment would soar to 15 per cent with the onset of Covid-19, it is a measure of the nation’s economic strength.

In a speech to the Australian Industry Group in Newcastle, a city in which an additional 25,000 people have gained work, Ms Bullock also emphasised the importance of getting inflation under control in maintaining employment. “If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment,” she said. “A deep and long-lasting recession would be likely, which would mean a substantial rise in the unemployment rate.”

For the first time in decades, she said, firms’ demand for labour exceeded the amount of labour that people were willing and able to supply. “That is, employment is above what we would consider to be consistent with our inflation target.” One of the channels through which higher interest rates work to bring down inflation is by reducing the demand for goods and services and hence overall demand for labour. “There are other channels, too, but this channel is important. What this means is that labour market conditions will invariably soften as inflation is contained.”

That basic point, part of a broader, well-balanced speech, drew hysterical, illogical reactions from union leaders such as the Construction Forestry Maritime Mining and Energy Union, the Electrical Trades Union, the Australian Workers Union and the Health Services Union. CFMEU national secretary Zach Smith said for a central banker to suggest unemployment needed to rise was shameful. Workers had been “pummelled by the RBA with a dozen rate rises, yet it seems this out-of-touch, hotbed of neoliberal economics isn’t finished its quest to dish out more pain”, he said. Acting ETU national secretary Michael Wright said it “appears there is no problem for which the Reserve Bank does not think working-class misery is the solution”.

Regardless of unions’ overreactions, Ms Bullock nailed the point about why the RBA board had been increasing the cash rate. That was to protect the economy from inflation, including family budgets, the value of savings, business investment and to ease income inequality, she said. While blaming interest rate pain on the bank, the union heavies have steered clear of blaming government spending or their own wage rises, secured without productivity offsets.

That concern was clear in the June 6 minutes of the RBA’s latest meeting at which rates were increased by 25 basis points to 4.1 per cent. At their meeting, board members noted that wages growth was still consistent with the inflation target, provided productivity growth picked up to around the average pace that had been recorded before the pandemic. But in considering the outlook for inflation, members discussed the problem that output per hour worked had not increased across the preceding three years. That is no recipe for sustained wages growth.