Despite a new year and a new way of doing things, the thinking at the Reserve Bank remains the same – inflation is all about people having too much money to spend rather than the actions of companies which are actually the ones raising prices.
With the first Reserve Bank board meeting of the year behind us – and the first under the new arrangements where the board only meets every six weeks rather than monthly – the prospect of more rate rises looks unlikely.
While the governor, Michele Bullock, tried to talk a big game about the RBA still being worried about inflation, few believe that will mean higher rates.
The market for some time now has pretty much banked in a rate cut by August and a few more to follow:
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And yet my concern is that the RBA, despite the new arrangements, which include a much shorter and less fussy statement by the board, continues to see inflation as a nail that can only be hammered by interest rates.
The latest statement on monetary policy, also released on Tuesday, makes this very clear when it rather blithely states on the summary page in bold that “overall demand is still greater than supply, but the economy is moving towards a better balance”.
Excuse me. Demand is greater than supply? By what measure?
And is it because we have too much demand or too little supply? Because if it is the latter, interest rates rises won’t do a thing.
The RBA has now downgraded GDP growth for 2023 from 1.6% to 1.5%. And whereas in November it thought the economy this year would grow by (a still pathetic) 1.8% in the year to June 2024, now it predicts a mere 1.3% growth.
The bank also estimates that gross national expenditure (GNE), which is essentially GDP minus trade, grew a lousy 1.4% across 2023 and expects it to rise to a very tepid 1.9% by the end of this year.
During the period from the end of 2011 until the end of 2019 when the RBA cut the cash rate from 4.5% to 0.75% in an attempt to stimulate the economy, GNE averaged annual growth of 2%.
But now apparently growth of 1.4% is a sign that we have too much demand in the economy!
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Perhaps the RBA thinks we are all getting paid too much?
That would seem odd given the RBA also now estimates real wages grew just 0.1% in 2023 and by the end of this year will only be growing at 0.4%.
That means average Australian real wages are now 4.5% below where they were at the end of 2019 and by the middle of 2026 will only be back at 2011 levels:
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Maybe it’s not wages but all the other income we have that is fueling this excess demand?
Certainly during the pandemic, stimulus such as temporary (and now finished) increases in the low-middle income tax offset boosted our incomes.
But the RBA estimates that not only have we lost all that pandemic stimulus, we are now back to where we were in 2019. Even worse, total household disposable income is an astonishing 5.1% below where we would have expected it to be given the trend of the decade before the pandemic:
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Of course, the RBA needs to keep that line that the problem is excess demand because if it starts admitting that inflation is more driven by supply-side factors and company profits then people might start to wonder why they increased interest rates so much.
The governor also argued that while rate rises could not directly affect the prices of things like insurance and electricity, it was still worth raising rates because they “go into business costs” and that “tempers the ability of [businesses] to pass on costs”.
Implicit in that line is that businesses can and have been passing on costs. And in doing so they have driven inflation.
This is why the Allan Fels inquiry into price gouging and unfair pricing practices released on Tuesday remains extremely pertinent.
The inquiry (to which I gave evidence in my role with the Centre for Future Work) found a decided lack of competition across a broad range of sectors including electricity, grocery retailing, banking, aviation, and early childhood education and care.
Crucially for how the RBA goes about lowering inflation, the inquiry found that “higher interest rates only served to see the banks, led by Westpac, the Commonwealth Bank, NAB and ANZ increase their profit margins above long-term levels”.
Fels also argues that companies have used “broader inflation trends as ‘cover’ to justify higher prices for their own products, even if their own production costs have not increased accordingly”.
Perhaps when the RBA thinks about inflation, it might consider how much cover it gives to these companies when it continually says demand factors are the main reason rather than putting the spotlight on their pricing decisions.
It might also ponder that the four major banks are laughing with glee every time the RBA decides to raise rates yet again, all in the interests of reducing supposedly excess demand.
• This article was amended on 8 February 2024 to give the correct RBA GDP growth forecasts
• Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
