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The RBA’s Australian inflation concern they won’t tell you about

But that’s obviously not an accurate representation of what’s happening now. The current inflationary episode has seen businesses large and small raise their prices sharply to cover the jump in input costs resulting from supply disruptions caused by the pandemic and the war in Ukraine.


While the rate of wage growth is a couple of percentage points higher than before, it was well below the further 5 or 6 percentage point increase in consumer prices.

So Lowe reversed the name of the problem to “price-wage spiral”. In announcing this month’s rate hike, he said “given the importance of avoiding a price-wage spiral, the board will continue to pay close attention to both labor cost developments and pricing behavior.” of businesses in the coming period”. .

Lowe admits that inflation expectations, the thing that could trigger a price-wage spiral, have not increased. “Medium-term inflation expectations remain well anchored,” but he adds, “it’s important that it stays that way.”

If that’s your big concern, Treasury Secretary Dr. Steven Kennedy doesn’t share it. He bluntly said last week that “the risk of a price and wage spiral remains low, with medium-term inflation expectations well anchored to the inflation target.

“Although measures of slack in the labor market show that the market remains tight, the projected recovery in wage growth to around 4% is consistent with the inflation target.”

Treasury Secretary Dr. Steven Kennedy believes “the risk of a price and wage spiral remains low.” Credit: Alex Ellinghausen

So why does Lowe remain so concerned about inflation expectations leading to a price-wage spiral that he expects he will have to keep raising the official interest rate?

There must be something he’s not telling us. I think his baffling concern about inflation expectations is a cover for his real concern: the oligopolistic power of prices.

Why doesn’t he want to talk about it? Well, one reason may be that the previous government gave him a board full of businessmen.

A better explanation is that it is reluctant to admit a cause of inflation that is not simply a matter of ensuring that the demand for goods and services does not grow faster than their supply.


Decades of large corporations taking over smaller firms and finding ways to discourage new firms from entering the industry have left many of our markets for particular products dominated by two, three, or four large firms: “oligopoly.”

The simple economic model lodged in the heads of central bankers assumes that no firm in the sector is large enough to influence the market price. But the whole point of oligopoly is that firms get big enough to influence the prices they can charge.

When there are only a few large companies, it is not difficult for them to reach a tacit agreement to raise their prices at the same time and by a similar amount. They compete for market share, but avoid competing on price.

To some extent, they can raise their prices even when demand is not strong, or keep them high even when demand is very weak.

I suspect what worries Lowe is his fear that our big companies might continue to raise their prices even as his higher interest rates have significantly weakened demand. If so, its only way to get inflation back into the target range will be to keep raising rates until it “squeaks” the economy and forces the bigwigs to pull horns as well.

It’s hard to know how much of the price hike we saw last year is due to companies exploiting their need to pass on increased input costs to customers as a hedge to fatten their profit margins.

We know that the Treasury has found evidence of rising profit margins – “mark-ups,” as economists say – in Australia over the past few decades.

And a study by the Federal Reserve Bank of Kansas City found that mark-ups in the US grew 3.4% in 2021.


But for Lowe (and his predecessors, and colleagues at other central banks) to clarify all this is to admit that there is an important dimension to inflation that is outside the direct control of central banks.

If he did, he might be asked what he did about the inflation caused by inadequate competition. He said competition policy was the responsibility of the Australian Competition and Consumer Commission, not the Reserve. True, but what an admission.

Indeed, the only person arguing about the need to tighten competition policy in the interest of lower inflation is the former chairman of the ACCC, Professor Rod Sims. Did he get any shred of public support from Lowe or Kennedy? NO.

Final point: what is the most glaring case of oligopolistic pricing power in the country? The Big Four Banks. Since the Reserve began raising interest rates, their already rich profits have soared.

Why? Because they wasted little time passing the raises on to their borrowing customers, but were much slower passing the raise on to their depositors. Did Lowe scold them? No, far from it.

But his predecessors did the same, as his successors no doubt will, unless we stop leaving inflation solely to a central bank whose only tool is to fiddle with interest rates.

Ross Gittins is the economics editor.

Ross Gittins breaks down the economy in an exclusive subscriber-only newsletter every Tuesday night. Sign up to receive it here.

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