From the moment the CPI figures were released two weeks ago, the general consensus of economists around the country was that the RBA would raise rates. And on Tuesday so it did, even if its reasons suggest it should not have.
In September, annual inflation fell from 6.0% to 5.4%. But the RBA talked itself into worrying about the one quarter of inflation in September that went up by 1.2% rather than the expected 0.9%.
Never mind that petrol prices had jumped 7.2% in the quarter, and that if they had remained flat or even fallen, as they had in March and June, inflation in September would have grown by that magic 0.9%.
Even with that 1.2% increase, annual growth will probably fall in December because the past four quarters include the abnormally strong December of last year when holiday prices rose an absurd 13%.
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Remove that quarter and even if prices in the December quarter this year grow again by that apparently scary 1.2%, annual inflation will fall to 4.6%.
That’s worth hitting households for the 13th time?
Apparently so.
But then as the RBA governor, Michele Bullock, recently told the Senate economics committee, when it comes to reducing inflation, RBA officials “only have one tool”.
When you only have a hammer, not only does every problem look like a nail, but you also tend to want to use the hammer, because what the hell else are you going to do?
Thus, we have the RBA hammering the economic nail harder than it has in more than 30 years.
Essentially, no homeowner under the age of 55 has had to cope with interest rates rising like this:
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In the past 19 months the RBA has increased rates by 425 basis points – 300 basis points more than it did in the 19 months from April 2006.
It is worth comparing those two periods to see how, even with greatly different problems, the RBA really thinks a hammer is the only solution.
Back then Australia was getting into the iron ore mining business, and the business was a-boomin’. Mining investment set off strong wages, household spending and construction.
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From the March quarter of 2006 (which was the quarter before the RBA began raising rates in May) until the June quarter of 2007, Australia’s economy grew 5.1%, compared with just 2.8% in the time since the March quarter of last year.
On a per capita basis Australia’s economy has not grown at all in the past five quarters, whereas back in 2006-07 it grew 2.9%.
That means the economy grew faster back then – even when discounting population growth – than it is now including population growth.
That is an astonishing difference.
Back then the economy was running hot, whereas right now it might be a stretch to say it is tepid.
Real wages in 2006-07 rose 1.3%, whereas they have fallen 3% since March last year.
In 2006-07 households were flush with cash. Household consumption grew 7.2% in real terms – almost double the 3.7% growth over the same length since March 2022.
Real household disposable income per capita grew 6.3%. By contrast, in the five quarters since March 2022 it has fallen 6.8%.
The reason for the big income growth in 2006 was twofold. Yes, there was the impact on the mining boom, but John Howard and Peter Costello also decided a booming economy was the perfect time to deliver income tax cuts in 2005, 2006 and 2007.
Those cuts put a lot more fuel on the fire.
By contrast, the big rise in household incomes prior to May last year was due to the pandemic stimulus. This wasn’t putting petrol on a firing economy but rather trying to stop the economic embers from going out.
And whereas in May 2006 incomes were rising, by the June quarter last year, when the RBA began to raise rates, they were falling:
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Which do you think is the situation in which spending and growth needs to be hammered into submission?
It is not as if the RBA does not know this. In her statement on Tuesday, Michele Bullock noted that “household consumption growth is weak, as is dwelling investment”.
So she wants already weak consumption to be … weaker??
The other problem of course is that interest rates do not affect everyone equally, and Bullock made it clear who the winners and losers were.
She noted that “the outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income”.
It’s a pretty clear statement that high-income earners are doing fine while younger ones struggling with the rising mortgages and rents are not. But hey, when hammering a nail, you’re gonna hit a few thumbs.
What these winners actually provide is an opportunity for the government.
Unlike the RBA, the government has more than one tool in its kit. And it can also learn from the mistakes of the Howard government by not giving tax cuts to people who don’t need them at a time when the RBA is raising rates.
The very group the RBA suggests are doing OK – those with strong savings buffers, and enjoying increased wealth due to rising house prices – are also among those who will probably benefit the most from the stage-three tax cuts due to come into effect next July.
Those still spending and giving the RBA cause to raise rates are about to be given a lot more money to spend.
This gives the government perfect justification to amend the stage-three cuts – it’s not about only being fair, they can rightly say it’s about keeping down interest rates.
But time is running out, and if Jim Chalmers and Anthony Albanese do not grab this moment, the hammer will probably shift from hitting homeowners to their government’s political fortunes.
Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
