Unemployment has also fallen in America and Britain, but whereas in their cases this is partly because a lot of workers have stopped looking for jobs and left the labour force, in our case labour force “participation” is almost as high as it’s ever been.
I’ll believe we’re all in for 3 per cent pay rises when I see it. And the man with his hand on the interest-rate lever is saying the same thing.
So why all the market and media gloom and doom? Because the rate of inflation was expected to be a below-target 1.5 per cent by the end of last year, but has jumped to 3.5 per cent.
The market thinks that higher inflation leads immediately to higher interest rates, and the media think higher rates are bad news because all their customers are borrowers and none are savers.
But the news on inflation – and the prospects for more of it – ain’t as bad as they sound, for several reasons.
First, if we really do have an inflation problem, it’s not nearly as great as America’s. The Yanks’ rate is 7 per cent, the Brits’ is 5.4 per cent and the Kiwis’ 5.9 per cent. Even in a globalised world, each economy’s story is different.
Second, it’s not as though most prices in Australia have grown by 3.5 per cent. Much of the jump to 3.5 per cent is explained by big rises in the prices of petrol and home-building. The world price of oil goes up and down over the years. Nothing we did in Australia caused the latest increase, and nothing we could do would have any influence on whether it keeps going up or goes back down a bit.
Other price increases are explained by the effect of the on-again, off-again waves of the virus in causing mismatches between the supply and demand for various goods – mismatches which are unlikely to last very long.
This explains why the Reserve uses a less volatile measure of “underlying” inflation to judge how inflation is going relative to the target of keeping annual inflation between 2 and 3 per cent, on average over time.
Its preferred measure of underlying inflation is running at 2.6 per cent, not the “headline” rate of 3.5 per cent, and 2.6 per cent is close to the middle of the target. So, no cause for concern – unless you have strong reasons to believe it’s rapidly heading up out of the target range.
Third, with this being the first time in six years that underlying inflation’s been high enough to reach the target zone, Lowe’s made it clear he won’t start raising the official interest rate until he’s convinced the return to target is “sustained”.
He made the obvious (but often forgotten) arithmetic point that, for inflation to be sustained at current rates, the prices of many goods would have to keep increasing at their recent rates, not just settle at higher levels.
When we’re talking about petrol prices and virus-caused mismatches between supply and demand, this seems unlikely. That is, there’s a good chance we’ll see a fall rather than a rise in the quarterly inflation rate.
Another basic point. One-off price increases only become part of the ongoing rate of inflation if they flow on to wages – that is, if they add to the “wage-price spiral”.
In the days when we really did have a serious inflation problem, that flow-through could be taken for granted. But over the past seven years, the link between rising prices and rising wages has become much less certain.
That’s why I’ll believe we’re all in for 3 per cent pay rises when I see it. And the man with his hand on the interest-rate lever is saying the same thing.
Ross Gittins is the economics editor.
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