Easing inflation provides a platform for more reform

The Albanese government is entitled to feel positive and relieved about the faster than expected easing in inflation to 4.3 per cent in November last year. It confirms the historic trend, which is for Australia to follow major overseas economies, notably the US where inflation is falling and the Federal Reserve is expected to begin cutting interest rates soon.

Wednesday’s welcome news from the Australian Bureau of Statistics suggests the Reserve Bank of Australia will not need to lift the cash rate further when it meets for its first meeting of the year on February 6. Given the lag in impact of rate increases already in the system, it is still possible the Reserve Bank will have to start cutting rates sooner than many had expected. Economists are still marking the potential of a recession as high as 40 per cent, as households shut their wallets in response to higher interest rates and rising prices.

On Thursday, however, Jim Chalmers can use the latest inflation numbers to claim the federal government’s actions have assisted the Reserve Bank in its fight. This includes subsidies for household power bills and other cost-of-living measures that ABS head of prices statistics Michelle Marquardt said had an impact on the November inflation figures. Excluding the rebates, electricity prices would have increased 19 per cent since June, rather than the 8.8 per cent recorded across the period, Ms Marquardt said.

The federal Treasurer adds a note of caution that Australia is “still a long way from prevailing” in the inflation fight, which he says has been inherited from the previous government. Dr Chalmers says inflation at 4.3 per cent in November, down from 4.9 per cent the previous month, is well below the 6.1 per cent “we inherited at the time of the election”. He says inflation is “around half the peak left behind by our predecessors”.

Given the global nature of the inflationary outbreak, this is both unfair and accurate. Supply chain disruptions because of the Covid pandemic and energy price spikes caused by Russia’s illegal invasion of Ukraine were exacerbated by lose fiscal policy and profligate spending by governments around the world. Central banks, including in Australia, were criticised for not acting faster to lift interest rates. Their actions reflected an optimistic view that inflation was transitory and due in large measure to the pandemic. While inflation has proved to be more entrenched than many thought it would be, leading to higher rates, it also has proved quicker to tame, particularly in the US, than many had expected as well.

The challenge for Dr Chalmers and Labor is to maintain sufficient discipline to keep the inflation numbers moving in the right direction to help the Reserve Bank achieve its target for the cash rate of between 2 per cent and 3 per cent as quickly as possible. This will include using increased revenue from the nation’s historic high terms of trade, a result of high iron ore and energy prices, to deliver a budget surplus and pay down debt. The federal government says it is now ready to focus exclusively on cost-of-living pressures, the dominant political theme of last year that many believe was overshadowed politically by the Indigenous voice to parliament referendum. If the economists are right, however, a stalling economy and possible recession may loom larger in the public mind this year.

Whatever transpires, the answer will be the same – to free the economy to grow. This involves delivering on the stage three tax cuts and looking at bolder reforms in company tax and government receipts more broadly. It must address the crisis in housing where regulatory imposts and labour shortages are adding unnecessarily to costs. Dr Chalmers wants to be known for reform. The easing inflationary pressures will give the Treasurer a platform on which to build.