Over the past few weeks some economists and commentators have become rather obsessed and unhinged about Australia’s inflation rate. You can, I guess, understand people focusing on inflation, but that should not mean forgetting that an economy is a bit more than how fast prices are rising.
The shadow treasurer, Angus Taylor, displayed his inflation myopia when he recently retweeted a chart showing that among “peer” countries of the US, Canada, New Zealand, the UK and the eurozone, Australia has had inflation accelerate since December last year.
Such political lines are understandable, but less clear is why commentators and economists would parrot them.
Last week came the news that Canada’s central bank and the European Central Bank (ECB) had cut their interest rates by 25 basis – this, commentators were quick to argue, proved we need higher rates to get inflation below 3%.
For example, the Australian Financial Review’s economics editor, John Kehoe, tweeted in excitement: “Canada becomes first major economy to cut rates, lifting market mood. This is what happens when you get inflation down to 2.7% and lift the cash rate to 5%. You can cut interest rates! Australia inflation is 3.6% and cash rate 4.35%.”
Yeah. Woohoo.
Alas, we need to add a bit of context.
Firstly, Canada’s cash rate has now been lowered to 4.75%, which is still higher than Australia’s current cash rate.
I’m not sure that cutting interest rates to a level still higher than Australia’s counts as a win.
Also, it is worth remembering Australia’s inflation began to consistently rise above 3% later than other nations such as the US, UK and Canada. It peaked later as well, and other than the December 2022 jump due to one-off travel prices, our inflation peaked lower:
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So it’s not surprising that Canada’s inflation might have come down earlier. Also given Canada’s inflation rose sooner than ours, its central bank (and others) began raising rates sooner than the Reserve Bank of Australia.
The ECB raised rates to 4.5% – marginally above Australia’s current cash rate of 4.35%. Is anyone really arguing that 15 basis points is the difference between getting inflation below 3%?
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And as for the RBA not being tough enough, in the first six months after raising rates, Australia went harder than the US, UK or Canada:
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Sure, the RBA (thankfully) did not increase rates by as much as they did in the US or Canada or the UK, but this is not surprising because our economy is rather different.
Remember that only two months ago the International Monetary Fund released a report that looked at the impact of interest rate rises in 25 major economies.
Australia was rated as the economy in which monetary policy had the strongest power. The US came in 10th, the UK 17th and Canada 18th.
The main reason is that a lot more people have fixed rate mortgages in those countries:
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Arguing Australia’s interest rates should have gone up as fast and as high as they did in Canada is to argue that Australians should have been hurt more than those in Canada for no reason other than to be able to walk around talking about how tough our central bank is.
But here’s the real context.
Canada’s unemployment rate is 6.2%; Australia’s is 4.1%.
Even worse, since March 2022, when inflation began to rise around the world and central banks began raising rates, Canada’s unemployment rate rose 0.7 percentage points from 5.4% while Australia’s has thus far risen just 0.1 percentage point.
Is this a situation Angus Taylor would like to see occur here, given he seems to envy other “peer” economies?
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While Italy’s unemployment rate has dropped considerably, it also has the highest rate across all G7 nations. And yes, the ECB cut rates, but the unemployment rate in the eurozone is 6.4%. Does anyone want to change places? Angus?
Similarly, the percentage of people aged 15-64 with a job in Australia has risen from 76.4% in the March quarter of 2022 to 76.9%, while in Canada it has fallen from 75.2% to 75%:
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One very salient point though regarding Canada is that in the past year its wages have risen 5.2% while here they grew 4.1%. That Canada can have stronger wage growth while also having lower inflation than Australia rather dents the argument that wages are the main driver of inflation.
Still, if conservative commentators and politicians here want to call for Australians to get wage rises above 5%, I am all for it!
None of this is to say Canada’s economy is in dire shape, or that the RBA have been geniuses or Australians are doing better than anyone else.
But this is what a soft landing mostly looks like – inflation coming down slowly while unemployment does not rise too significantly.
Those who salivate over other nations’ inflation and interest rates with barely any care for people losing their jobs really need to think about their priorities.
Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
