The nation appears “perched on a time bomb of inflation”
No, the government is not getting on top of the inflation problem that bedevils all Australians trying to factor it into business and personal considerations. Indeed, the consensus among Macks Advisory’s sources is that inflation is worsening and will continue to worsen. According to Jo Masters, chief economist of Barrenjoey, Australians are “already perched upon a unique time bomb of inflation with worse to come”.
Here’s an interesting coincidence: a few days before announcing the 12 May budget with workers bearing their heaviest tax burden since the 1980s, with inflation at a three-year high of 4.6% and the media saying the Reserve Bank of Australia (RBA) has been left with no alternative but to “hit the brakes and raise interest rates”, Treasurer Jim Chalmers echoed Ms Masters’ words by declaring “the worst is yet to come’.
And this was concurrent with a forecast from senior economists that real pain from the fuel crisis has yet to be felt.
The issue has of course been exacerbated by the Iranian war, but economists point out that before then, Australia was one of few countries burdened by “a positive output gap” ---a situation where actual output exceeds potential output, indicating an economy is operating above sustainable capacity.
Thus, Australia has been hit by the energy shock of a fuel crisis when its inflationary pressures were already too strong and its economy overheated.
It’s why the extraordinarily rapid rise of prices that economists admit they didn’t see coming, are expected to be indicative of what’s ahead.
“You are wildly underestimating the complexity of the current global energy crisis”. This is how one of the nation’s most senior oil company executives, also a government adviser on how best to manage the energy crisis, has responded to investors and other optimists predicting (as this article is being written) that the war which is causing energy shock and price surges, is about to end -- and all will soon be well again.
Price rises and consequences
Given the world is suffering what is probably the greatest energy shock in history, we’re sure newsletter readers haven’t been too surprised by recent by price spikes. However, we suspect many of them have, as have many economists, been staggered by the speed and spread of the damage price rises have done to businesses and their owners’ confidence.
Although people are thankful for the reduction of the fuel excise tax, most don’t seem too worried by the fact that the government’s largesse is being enabled by taxpayers’ money, at enormous cost to them now and well into the future.
The effective price of a barrel of Brent crude (sweet crude oil from the North Sea that serves as a global benchmark for oil pricing) has been as high as $127.61US in recent weeks, which means Australia has had to pay a premium close to $US20 a barrel just to maintain a guaranteed fuel supply and restore it to what it was before Donald Trump’s bombardment of Iran, and the Iranians began blocking shipping through the Strait of Hormuz.
In other words, the fuel crisis is creating more inflationary pressure in Australia than it is in many other advanced economies. No wonder deputy governor of the RBA Andrew Hauser has described the situation as “a central bankers’ nightmare”.
It’s a situation where the longer-term inflation expectations of consumers and business operators have become unanchored. Both groups have come to believe inflation will remain stubbornly high indefinitely and they’re making business decisions based on that belief.
Mr Hauser doesn’t mince matters when he says: “I expect to see CPI inflation return to the 10% to 20% range of the 1970s and early 1980s.”
So, to the immediate future
We’ve only to consider the never-ending media predictions of how fast inflation will trend and what interest rates the RBA should apply to keep any rises at 3% or less, to realise that assessing inflation expectations and consequences is an imprecise science.
It’s a realisation we suggest you apply to our report that economists who are recognised widely as experts, agree an economic slowdown is inevitable, pessimists among them saying there’s a 25% chance of a recession.
These pessimists are especially worried about the potential for wages to start reacting to rising inflation, and what the Fair Work Commission’s mid-year minimum wage decision will be.
The RBA’s rule of thumb is that the Commission’s decisions affect about half the nation’s workers either directly or indirectly via enterprise bargaining agreements or private deals between employers and employees, and pundits are widely tipping a minimum wage rise of 4.5%.
Although Ms Jo Masters (referred to earlier) and like-minded economists, worry about the “inflationary time bomb” we’re all sitting on, she’s not yet a recessionist. She gives consumers more credit for resilience than many analysts, pointing out that measures of employment “are generationally very strong”, saving rates are “reasonably high”, which together have enabled Australians, so far, to divert $30b into meeting costs associated with higher fuel costs and interest rates.
ANZ CEO Nuno Matos – he says it’s Australia’s “most international bank”—believes a recession is unlikely. While, because of the war in Iran, he believes there’s worse ahead for already weakened consumer and business confidence, he also believes both corporate and retail customers “are well prepared to weather further shocks”.
He says he’s witnessed in recent months “no material changes in borrowing behaviour, or rates at which retailers have sought financial help or agreements to help handle hardship.”
But surely, if the population remains resilient, apparently willing and able to meet price rises pushed upwards by businesses, then this can only make life harder for RBA board members in their efforts to curb inflation – especially when there’s no indication the government is prepared to shoulder its responsibilities.
The difficulty of making business decisions based on inflation expectation has of course been heightened by the Iranian war with no end in sight, but we hope the above round-up of expert opinion may help newsletter readers factor a useful calculation of inflationary risk into complex decision-making.
