Other countries are freaking out about inflation. Australia shouldn’t

Australia’s peer nations are all grappling with higher-than-expected inflation. It recently hit a 40-year high in the US (7.5%), and 30-year highs in New Zealand (5.9%), the UK (5.5%) and Canada (5.1%).

Australia’s uptick has been comparably smaller (3.5%). Yet some are understandably asking whether we’re simply a few steps behind, and if greater price rises are in store. The Morrison government seems to think so, with MPs expressing concerns that extending low- and middle-income tax cuts could fuel more inflation.

They’re right to watch carefully, for prolonged high inflation can be a serious problem. But some commentators are straying into hysterical or opportunistic territory, pre-emptively urging the Reserve Bank to raise interest rates and the government to cut spending to stave off the mere possibility of higher prices. This replicates a long-held pattern — whenever they smell a mere whiff of inflation, conservative commentators prematurely call for it to be crushed.

Why should you care? Because the methods they use will often lower your wages, limit your job opportunities and increase inequality.

Inflation wars are class wars 

The standard inflation-busters that “hawks” call for are interest rate hikes, government spending cuts and wage restraint. In the UK, for instance, rates have been raised twice this year, debate has arisen in Downing Street over spending restraint, and the Bank of England’s governor has attracted ridicule for asking workers not to push for pay raises while raking in huge sums himself.

It’s unsurprising that rich bankers worry excessively about inflation — it reduces the relative size of their stockpile. One’s bank account isn’t indexed, so when prices go up, the value of one’s savings falls.

But for the rest of us the medicine can be worse than the disease. Interest rate hikes increase the cost of borrowing. This doesn’t just hit mortgage holders — debt finances much business expansion, so it limits the number of jobs on offer too.

Similarly, cuts to public spending often lower welfare recipients’ incomes and kick public servants out of jobs. Unemployed people thus have lower incomes and fewer chances to find work, workers have fewer opportunities to trade in crappy jobs for better ones, and businesses face less pressure to offer employees good conditions to stem staff turnover.

Inflation hawks rarely spell this out, but they’re usually asking the authorities to prop up their fortunes by keeping the working class in their place; to reduce the price of things by reducing the ability of the lower and middle classes to buy those things. As Lord Farquaad said in Shrek, “Some of you may die, but that’s a sacrifice I’m willing to make.”

This came into sharpest relief in the 1970s when various politicians and bureaucrats used the crudest possible methods to break inflationary spirals, pushing millions on to dole queues and entrenching a low-wage paradigm for decades.

In 2022 there are other inflation-busters we should try first, particularly clearing supply-chain bottlenecks, which COVID has multiplied, and smoothing shifts in purchases from services to goods (when COVID cases spike, many substitute events and travel for clothes and electronics).

If things are growing desperate, blunter instruments might need to be used, but only with restraint and recognition of the human costs.

In Australia, we’re nowhere near needing them. We’ve only just achieved a “hot” jobs market, workers have barely seen wage growth, and prices have only risen modestly.

Bidenomics is a welcome reprieve 

The Biden administration and US Federal Reserve have most ambitiously broken with the inflation hawks, keeping interest rates low and pushing through big infrastructure and welfare bills.

“Instead of workers competing with each other for jobs that are scarce, we want employers to compete with each other to attract work,” Biden said in May.

He achieved this goal, raising employment and wages significantly and improving social outcomes. Until rogue Democrats scuttled transformative child payments, US child poverty was on track to nearly halve.

Biden could’ve pushed even further, but a sclerotic Congress concentrated his spending in shorter bursts, which may have poured fuel on COVID-related inflationary pressures. Officials are likely to have to smooth out stimulus from now on.

But his achievements should be instructive. Some had previously wondered whether the global economy had simply entered a period of lower wages and growth, perhaps due to some immutable factor like technology. Some prominent Australian progressives reluctant to give Prime Minister Scott Morrison an inch of credit are still bizarrely claiming that our lowest unemployment level in 13 years is due to migration restrictions, not record levels of stimulus. They should look to the US, where borders have been open since November yet jobs and wages just keep rising.

Governments aren’t impotent bystanders. They can put more people to work and improve their pay if they want to — they simply weren’t previously due to a frugal and inegalitarian consensus. The constraint of inflation is real and must be handled deftly, but by cowering in the face of its mere possibility, we forgo the benefits that other countries are enjoying.

We can only hope the federal government doesn’t put up the umbrella at the first sight of a distant cloud.