Smashing the demand for groceries in order to fix a supply side problem is a wrong-headed monetarist solution.
Lettuce prices are through the roof. Beans too. If monetarist thinking prevails at the Reserve Bank Board’s meeting on Tuesday, the bank will hike interest rates sharply to bring down the prices of groceries and everything else to prevent a wage-price spiral.
That is a prescription for a recession.
Smashing the demand for groceries seems a strange way of dealing with supply shortages. Much of Australia’s present inflation is being caused by supply-chain problems arising from disruptions caused by the COVID-19 pandemic and the war in Ukraine.
Instead of crushing the demand for goods and services in short supply we should be working hard and fast to fix supply problems wherever possible.
We don’t even have a good readout on how much of the inflation is transitory and how much is now embedded into people’s expectations. Rising electricity prices will be with us for several years as the system decarbonises and ageing coal-fired power stations are closed.
The war in Ukraine is likely to elevate fuel prices for the foreseeable future.
But not everything is going up. The cost of transporting shipping containers is beginning to fall, as are the prices of many commodities. So, too, are house prices in most Australian states.
Talk of a 1970s-style wage-price spiral is foolish. When the two oil-price shocks hit our shores in the 1970s the high oil prices fed into wages, which raised prices in a vicious cycle.
It took the Hawke-Keating Prices and Incomes Accord with the trade union movement to moderate wage claims in exchange for improvements in what became known as the social wage – Medicare, government assistance with school expenses, and later, guaranteed superannuation for working people.
Unions would have been able to secure much bigger wage rises in the field, especially during the recovery after the early-1980s recession, but they voluntarily moderated their wage claims.
Those monetarists who argue a destructive, new wage-price spiral must be averted through sharp increases in the cash rate conveniently ignore the changed structure of Australia’s labour market. In the 1970s around half the Australian workforce was unionised whereas union membership today is less than 15 per cent.
Moreover, the industrial relations laws are much more restrictive now than they were in the 1970s, limiting the ability of unions to take lawful industrial action.
Warnings of a wages breakout will remain just that unless and until official statistics confirm it. The Reserve Bank has referred to its liaison with business, but that is hardly a statistically sound basis for decision making.
The official data is still showing real wages are falling, the rise in the wage price index for the March quarter of 2.4 per cent being well below the 5.1 per cent inflation rate for the same period.
True, job vacancies are so large that there is now only 1.1 unemployed person for every job vacancy. Wages pressures are due mainly to low immigration levels, which are temporary not structural.
Reserve Bank Governor Phillip Lowe has signalled he would not be too worried if wages growth were 3.5 per cent https://www.afr.com/policy/economy/rba-puts-3-5pc-lid-on-wages-20220621-p5avg4 At this stage there is scant evidence that aggregate wage growth is faster than this. That evidence might come but the Reserve Bank should not overreact on Tuesday and slam on the brakes.
Of course, the Reserve Bank should continue to normalise interest rates from their pandemic lows, consistent with achieving full employment and inflation in the 2-3 per cent range. But smashing the economy through sharp increases in the Reserve Bank’s cash rate to deal with supply shortages would be the ultimate blunt instrument.
Consider the folly of the monetary authorities saying they had solved the tomato shortage problem by smashing the economy, making lots of people unemployed and ensuring the remaining employed workers were so worried about the future that they thought it too risky to buy tomatoes anyway and increased their savings instead.
That’s the sort of prescription we hear from monetarists, businesspeople and conservative politicians who’ve never seen a wage rise they liked.
Following the real-wage overhang from successful wage claims in the late-1970s the 2000s has been marked by a real-profit overhang and a real-wage underhang as real wages fell from around 2013 while profits surged.
Surely the answer to every macroeconomic problem is not to cut real wages further. If conservatives want to smash anything, try smashing avocados. They’re very cheap at the moment.
Craig Emerson is managing director of Emerson Economics, director of the APEC Study Centre at RMIT University, visiting fellow at the ANU and adjunct professor at Victoria University’s College of Business.