Treasurer Jim Chalmers’ claim that Australia’s inflation problem is mainly caused by the Middle East oil crisis should be taken with a grain of smelling salt given the Reserve Bank - and a former Treasury economist are already awake to that spin.
The RBA’s chief Michele Bullock and Warren Hogan, an ex-adviser to Treasury, have both pointed out that domestic pressures are really the culprit.
Dr Chalmers was out there an hour after the Australian Bureau of Statistics revealed the worst inflation since the start of the Iran war talking up the surge in crude oil prices.
“We already had an inflation challenge in our economy and the war in the Middle East is making it worse,” he told reporters in the Blue Room of Parliament House in Canberra on Wednesday.
“We’ve seen higher oil prices driving higher inflation around the world and today’s figures confirm that we are not immune from that and that’s why once again from an economic point of view, the end of the war in the Middle East can’t come soon enough.”
Australia is hardly the only nation in the world to be suffering the inflationary effects of higher crude oil prices.
Yes, the consumer price index was the worst since March, during the early days of the Iran war.
This was after the Ayatollah’s Islamist terror proxies in the Middle East expanded their chaos beyond the Strait of Hormuz to launching drone strikes on Saudi Arabia’s East-West crude oil pipeline, connecting the Persian Gulf to the Red Sea in September.
This occurred as average unleaded fuel prices climbed closer to $2.40 in the final week of September, leading to a 23.6 per cent annual surge in fuel prices that has boosted the headline inflation rate, also known as the CPI.
Home-grown inflation
But a closer look at the ABS data showed that inflation from Australian-made goods and services really soared, with this category - known as non-tradables inflation - growing by 4.5 per cent.
This was much higher than inflation from imported products, known as tradables inflation, which surged to 4 per cent, up from 2.9 per cent in August, as Iran-backed attacks on Saudi oil pipelines pushed crude oil prices back above $US100 a barrel.
The RBA’s preferred measure of underlying inflation stripping out volatile price items, known as the trimmed mean, remained elevated at 3.6 per cent.
Like the headline pace of inflation, that reflects the Middle East oil crisis, underlying inflation now also been above the Reserve Bank’s 2-3 per cent target for 14 straight months.
The effects of the Iran war have so far only been covered in six full months of official data.
Australia’s inflation is also broad-based with NAB noting that 60 per cent of items in the consumer price index basket were above 3.5 per cent.
Reserve Bank governor Michele Bullock stressed that domestic factors are driving inflation in her opening statement to a Senate economics Budget estimates hearing shortly before the ABS released more bad news.
“Importantly, though it’s not just these global pressures that are driving inflation in Australia,” she said by video link.
“While they are certainly compounding the inflation problem, we still see inflation rising from domestic capacity pressures.”
Former Treasury economist Warren Hogan said it was misleading to claim Australia’s inflation problem was mainly related to overseas factors.
“It’s entirely a domestic problem: the real problem we have is that we have a domestic excess demand, we have too much demand in the economy for the economy’s supply capacity to deliver the goods and services,” he told The Nightly.
“This is putting cost pressures throughout all organisations, businesses, from effectively just about every element of the input into production and of course, what the global shock does is it not only creates things like a rise in petrol prices which show up in that headline figure but it ricochets through the economy, it gets amplified by the domestic cost pressures of the capacity constraints.”
Andrew McKellar, who heads the Australian Chamber of Commerce and Industry, also seized on this fact to suggest domestic factors were driving Australia’s stubbornly high inflation.
“Small businesses and mortgage holders should not be left to foot the bill for Australia’s home-grown inflation problem,” he said.
“It is time for governments to step up, lead with serious economic reform and stop trying to raise taxes.”
High government spending
With Commonwealth Government spending already at a four-decade high, outside of COVID, Dr Chalmers claimed “Budgets aren’t the primary driver of prices in our economy”.
“We take responsibility for government policy when it comes to the fiscal settings and when it comes to managing the Budget in a responsible way in the face of this inflation challenge, which is persisting longer than anyone would like,” he said.
That claim was made despite Treasury secretary Jenny Wilkinson reluctantly admitting high public spending was adding to demand in the economy.
“No one’s denying that government spending contributes, is part of demand in the economy,” Ms Wilkinson said under questioning from the Liberal Party’s deputy leader Senator Jane Hume.
“No one’s denying that. That’s clearly the case.”
Mr Hogan said high government spending on the care economy, including the NDIS, had seen Commonwealth spending sit at 40 per cent above the five-decade average.
“They’re absorbing the very scarce labour and capital resources in the economy and creating competition with the private sector which will either put upward pressure on wages,” he said.
“It’s really recurrent government spending that needs to be addressed — the single biggest standout across all levels of government in the last decade has been the Federal Government’s care economy strategy headlined by the NDIS but not exclusively the NDIS,” he said.
“That way that it will create inflationary pressures is we live in a much more capacity constrained economy than we’ve known for two or three generations.”
Weak productivity
Australia’s weakest productivity for more than a decade means that the economy suffers from an inflation problem wherever economic growth rises above a still relatively weak level of 2 per cent.
Dr Chalmers argued it would take time for Labor’s productivity programs to work.
“First of all, more than acknowledge that our economy’s got a productivity problem, we have put in place the biggest and broadest productivity package in any budget for at least three decades,” he said.
But Mr Hogan said high government spending would only crowd out the kind of private investment in new technology, including AI, that would make Australia more productive and reduce inflation over the longer term.
“If you’re growing your share of the economy and therefore crowding out the private sector in labour and capital markets — that is making it hard for business to get hold of staff and therefore not wanting to expand — you’re reducing the ability of the private sector to be productive in the future,” he said.
“I can tell you that the one thing that we can do that will improve productivity, in the short-term more than anything else, is actually to reduce the size of government in our economy.”
At least inflation is a problem the Federal Government does have some control over.
Putting the blame squarely on the Middle East oil crisis is an unconvincing cop-out that no amount of spin can sell.
Wake up and smell the $6 coffee instead of those dangerous smelling salts.
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