Inflation is coming down fast so we should now shift our attention to making sure unemployment does not rise
The latest quarterly CPI figures showed that inflation is falling dramatically and in line with that of other major economies such as the USA and Canada. This, Chief Economist, Greg Jericho writes means we have a prime opportunity to lock in the current level of low unemployment.
Through the past year of the Reserve Bank raising interest rates, the main justification has been that the economy needs to be slowed in order to bring down demand pressures on inflation.
What the latest figures reinforce however is that the major pressures have come from the supply side. Australia’s inflation is essentially following the same path as other nations. This is because inflation is slowing largely due to reduced world prices of commodities rather than any response to increasing interest rates.
Indeed the largest driver of inflation in the June quarter was rental prices, which will have been in part due to investors raising their prices to deal with higher mortgage payments.
In the past year, unemployment has remained at 3.5% while inflation has gone from 6.7% up to 8.4% and now down to 5.4% (using the monthly measures). The belief that we needed to raise unemployment to 4.5% in order to stop inflation from accelerating is a cruel approach that treats inflation in the wrong way.
Fortunately, in spite of the RBA’s best efforts, unemployment has not yet risen. This presents Australia with a genuine chance to lock in historically low unemployment as the norm.
Rather than pursuing higher unemployment in order to reduce inflation the RBA and the government should be pursuing policies that keep unemployment low while also reducing inflationary pressure. This can mean a price cap on essential items such as rents and energy, introducing windfall-profits taxes, and increased public housing investment to reduce housing price surges.
Interest rates are not the only way to tackle inflation and in an environment where profits are been driven by supply-side issues and profits they are one of the worst ways.
Full employment needs to be the target, not a mythical “non-accelerating inflation rate of unemployment” that largely justifies higher unemployment and more ho0usyheold living in poverty.