Peril of the inflation infection

Suddenly it’s like the 1970s, as Reserve Bank governor Michele Bullock warns inflation is now less imported than homegrown. Certainly she says it is expected to drop to 2.5 per cent or so by 2025, way below its recent peak of 6 per cent plus. But expecting inflation to fall does not mean it will, and the Albanese government must work to contain it. This is not news to Australians who remember standards of living reducing and savings value eroding in the 20-year struggle to contain inflation from the early 1970s. But it is unknown to the millions of people not born when the annual consumer price index was up 17.7 per cent in March 1975. There is a generation of politicians and policymakers who have not faced inflation infecting the economy, nor the terror of not having the tools to fight it. Like the Whitlam years, our present circumstances have the potential to be bad for a government with big plans for social change but insufficient stomach for the economic reforms and tough politics to pay for them.

In a speech on Wednesday Ms Bullock set out where we are. She acknowledged our present inflation was originally imported – by pandemic disruptions to global supply chains and by energy cost increases caused by Russia’s invasion of Ukraine. However, while supply-side inflation is now coming down, it is being replaced by cost increases for local goods as well as services – she cited hairdressers and dentists, dining out, sporting and recreation as examples of consumption that costs more. She also warned that weak productivity growth is driving demand that is outstripping supply.

The challenge, she said, is to use monetary policy to get inflation back to target range by slowing growth in demand, while employment continues to grow. Easier said than done – as the Whitlam and Fraser governments discovered to the nation’s cost. Get it wrong and expectations of inflation become self-fulfilling while high interest rates reduce jobs growth. In 1983, inflation and unemployment were both nearly 10 per cent, the former double and the later nearly five times a decade prior.

Nor can the RBA do it all. The challenge for government is purging inflation when ministers have plans to spend big. Economic ministers clearly get this – demonstrated by the government’s dropping 50 transport projects, in part, to take pressure off the construction sector. However, the government is still awash with Whitlam-era ideas that will eat resources, plus ambitions to re-regulate employment, which will erode productivity. It is an article of faith in cabinet that government can grow the economy by investing in manufacturing. Industry and Science Minister Ed Husic has $1bn to spend on research and development for quantum computing, which he says could create 19,400 direct jobs, with $5.9bn of revenue, by 2045. At the other end of the tech spectrum, the government wants “more good jobs in rail manufacturing”.

These are relatively small amounts of money but they reflect an apparent belief that government can fund everything from the NDIS to AUKUS if it creates a new manufacturing base, an heir to one that could not compete globally 50 years ago.

Mr Husic set out the hope in a speech to the Sydney Institute early this month. He idealised the western Sydney of his childhood, where manufacturing was honourable and well-paying work. And Australia, he said, can do it again, with high-skilled and well-paid jobs. “We need governments that lean in and help, rather than stand back and hope.” But Mr Husic’s hopes are based on another ’70s staple – unionised employment, awash with award conditions that unnecessarily inflated prices of goods and services. A government industrial relations ambition is for workers to be employed under the same conditions across industries. This ignores the reality that businesses are not like the public service and that circumstances must set pay scales to keep people employed and products and services competitively priced.

Increasing supply-side costs without productivity improvements, and growing GDP and the tax base that comes from it by magic manufacturing puddings, are not ways to sustainably expand the economy. The government’s ambitions for a 21st-century tech take on a unionised industrial economy may play to Labor’s base but they do not suit the immutable economic challenges that no government can wish away. Without real and sustainable growth, inflation, and the economic misery it brings, will remain. This was a lesson learned in the 1970s and 1980s – perhaps so much time has passed that Australians will end up having to learn it again.