Time to take one for the team, Australia

RBA Governor Philip Lowe has implied sacrifices would need to be made for community wellbeing, writes Tom Dusevic. Picture: Getty Images

The nation is rushing to another Team Australia moment, as the Reserve Bank muscles up against inflation and workers resent that their pay packets are shrinking.

In a speech on Tuesday, RBA governor Philip Lowe outlined the daunting challenge of reining in prices growth and implied sacrifices would need to be made for community wellbeing.

An economy at full steam, with any willing warm body seemingly able to secure work, isn’t producing the goods and services that cashed-up households are demanding.

Yet state treasurers focused on their election cycles didn’t get the memo about not adding to demand and inflationary pressures. Fresh social spending in the NSW and Queensland budgets won’t make the RBA’s task easier, as Lowe tries to navigate an ever-narrowing path on interest-rate hikes without crashing the economy. Cash bonuses for health workers, vouchers for school kids, more spending on childcare and hospitals, and more, all to be funded by extra borrowing.

Lowe sounds confident a wage-price spiral can be avoided as long as the coming pain is shared. He gave cautious support to last week’s $40-a-week bump to the minimum wage but will be hoping our pay-setting infrastructure does not slide into 1970s wage-indexation, a beast that can never be sated.

It means as inflation rises here, as it is all over the world, expectations around future price rises must be kept in check.

Lowe wants Australians to think about the wider world. Oil and food prices are surging because of supply snarls, Russia’s assault on Ukraine and China’s severe Covid-19 lockdowns.

“When major events like these occur, it simply isn’t possible to insulate ourselves here in Australia from their effects,” he told the American Chamber of Commerce in Australia event. “We live in an interconnected world and big shocks in global markets ­affect our domestic markets and the prices that we pay.”

In many ways, we’re lucky. Because we are an energy and food exporter, the world has given us a big payday, which will wash through as profits, dividends, taxes and royalties, and social spending. The coal-price bonanza comes in the form of more jobs in health and debt repayments.

It’s a dynamic system, where one thing, say the cash rate or governor’s language, leads to ripples and shocks in other parts of the economy.

Imagine trying to explain what you’re doing in real-time, let alone hitting moving targets.

There are also home-grown factors on inflation, and this is where our strained capacity comes into play.

In his speech, Lowe talked about the “technical” difference between price levels and rates of growth, but households confronted by elevated fuel and power bills, higher mortgage repayments and loss in wealth will not be thinking about buffers – they’ll be asking the boss or union delegate for a bit more pay.

If their employer can pass the parcel on costs or fears losing a skilled worker to a rival, they may get that pay rise, which the RBA chief is hoping will “start with a 3”.

Lowe is confident inflation will peak at 7 per cent and then subside, as global pressures ease and higher interest rates do their job.

Again, psychology and behaviour – of business, households, unions and government – is all important. There has to be give and take, just like during the worst days of 2020 and 2021.

“As we chart our way back to 2-3 per cent inflation, Australians should be prepared for more interest rate increases,” Lowe said.

“The level of interest rates is still very low for an economy with low unemployment that is experiencing high inflation. I want to emphasise … we are not on a pre-set path.”

We’re all on notice. The only thing pre-ordained appears to be the central bank’s resoluteness: no gain without pain.

If we take one for the team, Lowe & Co will steer us away from the danger of our borrow and spend instincts. Maybe state treasurers will eventually get with the program.