Inflation is back, interest rates to follow

The Consumer Price Index for the December quarter, released on Tuesday, was generally well-covered in the media. It came in at 1.3 percent for the quarter: if that rate were to be sustained over four quarters it would indicate annual consumer inflation of 5.3 percent – well above the Reserve Bank’s 2-3 percent comfort zone.

In view of the government’s forecast that nominal wages will rise by only 2.25 percent this year (published in the MYEFO documents in December) the ABS is confirming what most consumers are already well aware of – incomes aren’t keeping up with costs. Also, inflation is probably having its worst effects on those who are least well-off, for while inflation over 2022 has been only 3.5 percent, for “non-discretionary” items prices have risen by 4.5 percent.

Apart from gasoline, which has seen wild price moves in recent months, most price rises seem to be established. Prices of goods are rising faster than services, possibly reflecting a low $A exchange rate and high freight costs, both of which would be pushing up the price of imports. The price of clothing and footwear, for example, most of which would be imported, rose by 2.6 percent in the quarter.

We can expect the next CPI, due for release in late April, to show further inflationary trends. For example, in spite of labour shortages, food prices are yet to rise. Inflation isn’t some smooth process as the economic textbooks suggest. Rather, prices can stay on hold for quite a long time before businesses move to raise prices. For large firms in oligopolistic markets pricing is a strategic exercise (in the true sense of the word “strategy”): firms hold off waiting to see what their competitors do, because there is a high risk in making the first move. But eventually someone does move, and others follow.

Apart from its reflection of a cost-of-living squeeze, the re-emergence of inflation puts pressure on the Reserve Bank to raise interest rates, even though it had promised to hold rates until 2023 or 2024 – a promise that looked good at the time it was made in the early stage of the pandemic but that appears to be less and less able to be kept.

On the ABC’s AM program, Sabra Lane discussed with Peter Martin the likelihood of the US Fed raising interest rates in response to inflation in that country – 7.0 percent over 2022, the largest rise since 1981. If the USA moves, will our Reserve Bank follow, breaking its pledge to keep rates on hold until 2024?

The Reserve Bank is nominally independent from government, but does its reluctance to raise interest rates reflect a desire not to embarrass the government before the election? It would suit the Coalition very well if there were to be a hike in interest rates in the first month after election of a Labor government.

Australian corporate executives are well ahead of the government on climate change

Deloitte has published its survey of business executives’ beliefs and practices on climate change – The Deloitte 2022 CxO sustainability report.

While the survey is global, its findings for Australia can be downloaded from the main link.

Australian executives are well aware of the reality of climate change: 86 percent of executives surveyed agree that there is a climate crisis. But as the report points out “there’s a disconnect between the recognition of the need to act, and the actions that must follow”. The executives surveyed “are not yet convinced on the link between climate action and the core drivers of value creation – long-term revenue, margin, and asset values”.

Almost all (95 percent) of Australian executives surveyed agree that “it's important for my country's national government to play a role in mitigating the impacts of climate change”, but only 74 percent believe the Australian government is doing a good job.

The report’s authors sketch a five-step method for companies to reduce climate-related risks and to “capture value from the climate agenda”.

What a time to drop assistance to the needy

In late 2020 the Commonwealth introduced the Pandemic Leave Disaster Payment, designed to provide support for those who had to take time off work when infected with Covid-19 or who were in close contact with someone infected, but who do not enjoy the benefits of sick leave or other leave provisions. Its beneficiaries have been mainly casual workers, including many in the most precarious situations.

The need for the program hasn’t lessened, but this month the Commonwealth quietly announced that eligibility for the assistance has been cut severely. To qualify one must now show evidence of a positive PCR or RAT test, and, as ACOSS CEO Cassandra Goldie points out in The Conversation, the changed rules are toughest on the most disadvantaged: What a disaster: federal government slashes COVID payment when people need it most.

Goldie’s article explains the equity issues clearly. Even if one leaves compassion aside, there is something fundamentally dumb about cutting transfer payments at a time when there is a crisis in the economy, as businesses suffer the effects of what has become, de facto, a lockdown. Because the poor generally spend every cent they get, transfer payments to the neediest are the most effective means to give the economy a needed fiscal boost.

During the pandemic the Morrison government has engaged in a huge program of fiscal stimulus: we can be thankful that it has not been so enslaved by its own propaganda and lies about budget deficits and government debt. But the way it has gone about stimulus payments has generally been economically reckless and unfair – a mark of a government that is either callous or clueless when it comes to economic management.

Omicron has hit the world economy

The IMF World economic Update has a substantial downward forecast for world economic growth over 2022, particularly in the “advanced” economies of EU and the US, as well as in China, Brazil and Mexico.

The main culprit is Omicron, but there are also disruptions other than those directly arising from the pandemic. Some countries have been too sudden in withdrawing fiscal stimulus. Inflation is resurgent, largely as a result of high prices for fossil fuel. The IMF update states that “inflation is expected to remain elevated in the near term, averaging 3.9 percent in advanced economies and 5.9 percent in emerging market and developing economies in 2022, before subsiding in 2023”. It notes that market interest rates are becoming more volatile, and that monetary authorities are generally in a tightening phase.

Its main report makes no mention of Australia. In its separately linked data tables it predicts that Australia’s growth will be 4.1 percent this year, the same in its forecast made in November last year.