Prices, Interests Rates and Continuing Stagnation – Effects and Causes (part 1)

For union delegates and members, feminist, environmental and community activists

For a starter on part 2 here is a discussion about that on Radio 3CR’s “Solidarity Breakfast”, presented by Annie McLoughlin last Saturday, August 3rd. 

Is stagnation getting worse?

The broader context is continuing general stagnation in the Australian economy, interacting with stagnation in other countries, maybe worse, including the USA. The RBA is not contributing any solution to this bigger problem.

Australia has been on the edge of recession since before the pandemic. Many working-class people have been living recession-like lives for at least a couple of years. Continued stagnation and recession are not good for most of humanity nor the rescue and renewal of nature.

This first part discusses Australia’s latest cost of living data (CPI - “headline inflation") and the implications for workers and the environment, especially the Reserve Bank of Australia (RBA) decision on interest rates. Insurance prices are a good example of the interaction between interest rates and the twin exploitations of people and the natural environment.

The RBA’s new 64-page Statement on Monetary Policy says nothing about profits and profitability, despite clear evidence of the causal role (and here). The RBA catechism includes: “Profits are irrelevant to inflation. Wages are very relevant.” Sure.  

Part 2 shifts to how progressive and left-wing activists can learn about such moments and take that to a broader audience beyond our echo chamber.

A key aspect of that is there are four, arguably five, contending explanations for what’s happening with price inflation. The RBA “opinion” is just one of them. Knowing more about these can help improve the struggles against exploiting people and nature, especially to sort out the bulldust in most mainstream media commentary and political parties. Bulldust can subdue struggles against various forms and expressions of exploitation.

The ABS’s new prices and inflation data

The Consumer Price Index (CPI) data for the March quarter shows inflation at 3.8%. We see a small increase in the context of a general trend downward. The related “trimmed mean inflation” (that irons out volatility in some prices) continued to fall to 3.9%.

The CPI is an “average” of price increases paid by household consumers and, therefore, includes bigger price increases in some categories. Four of these deserve brief comment.

First, housing prices remain higher than most other areas. The significant factor driving this is interest rates and associated profit-taking.

In other words, the RBA’s “solution” to inflation – high to higher interest rates – worsens the housing problem, especially for middle and low-income workers. Without the Labor government’s increase to the Commonwealth Rental Assistance Scheme (CRA), housing inflation would be 9.1%. 

Second, electricity prices went up 6% over the 12 months to June 30, compared to 2% in the 12 months to March 31.  Electricity would have gone up 14.6% if not for the Commonwealth government’s rebate scheme. (Source: ABS.)

Both points are relevant to the political party response to the new figures. (See below.)

Third, insurance prices rose by a whopping 17% from about 3% 2 years ago, mainly driven by climate change-related disaster claims.

Most workers are at wage levels chasing price increases and, as Greg Jericho establishes, the evidence is clear that there is less spending in shops. The RBA’s suppression of consumer demand is happening.

Responses: political parties, the ACTU and others.

The big four banks expected interest rates to be cut.

The Labor government’s Treasurer, Jim Chalmers, acknowledged the new CPI figures were still too high, although heading in the right direction generally despite the small blip, and too slowly. “Sticky” is the new buzzword.

He can claim the government is not driving price increases and some aspects of his moderate fiscal policy soften the impact. For example, energy rebates taking electricity increase to 6% instead of 14%, and rent increases at 7.3% instead of 9.1% because of his increases in Commonwealth Rent Assistance (CRA). Likely, these programmes will have to be extended.

However, in the real world, his claim is offset because the government's fiscal (taxing and spending) effort is modest and piecemeal relative to what is needed. There does not yet seem to be a sense of urgency about these increases that real-world experience demands.

The LNP, predictably criticized and downplayed the government’s fiscal efforts to provide cost of living relief. Their Shadow Finance Minister, Jane Hume, attacked fiscal measures, pointing towards a classic LNP austerity budget (a la Abbott and Hockey 10 years ago) in which there would be nothing for the majority regarding electricity prices and housing and the like.

The Greens argued there is no case for rate rises and, stressed the urgency of fiscal measures, including a rent freeze, breaking up the supermarket duopoly, and “making price gouging illegal”. Apart from no interest rate increase, they offer nothing re monetary policy settings.

The Australian Council of Trade unions (ACTU) mirrored the Greens’ call for no “rate hike” and pointed out that would cause rent increases.

This is an essential point: hypocritically, the RBA drives one of the most serious inflation problems and has been doing so for some time. However, the ACTU, perhaps surprisingly, does not call for a cut to interest rates.

The ACTU draws attention to the global scene in which the general trend is down but slow and jagged.

As real as price gouging may be, the ACTU and the Greens who suggest it, do not explain why duopoly or oligopoly in key industries cause inflation. Oligopoly has been real well before inflation as we now know it. (See a bit more in part 2.)

Separately, the ACTU points out that women’s pay is steadily rising and, “real wages are growing but still lagging well behind what was lost – 4.8% less than pre-pandemic last quarter 2019.”

Judging from its regular statements, we can expect the RBA to say this is a problem.

The employers have not said anything of substance beyond their usual pleas for downward pressure on wages and other labour costs. The Australian Industry Group’s (AiG) muddled statement made just a passing reference that high rates are not so good for investment prospects.

The Australian Council of Social Services (ACOSS) is the only big organization that argued the CPI justifies a cut to interest rates.

The Reserve Bank (RBA) response: profit led inflation? “We see narrrthing!”

Today’s RBA response to the inflation data holds interest rates where they are. The mainstream economics chorus expecting and wanting a hike fell flat, for the time being. Those who represent the working class that needs a rate cut, but did not argue it, should re-think their position.

Another two months of the RBA status quo will do nothing for workers with mortgages and rent to pay.

The RBA’s 64-page Statement on Monetary Policy says nothing about profits and profitability. The RBA catechism for all its acolytes: “Profits are irrelevant to inflation. Wages are very relevant.” Sure.  

Thus, the RBA turns its back on one, arguably 2, of its 3 pre-eminent duties:

It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank ... are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:

a.     the stability of the currency of Australia;

b.     the maintenance of full employment in Australia; and

c.     the economic prosperity and welfare of the people of Australia.

The RBA has constructed a belief system, in which rational and scientific thinking is set aside, saying unemployment to suppress wages fulfils their duty.

Using interest rates as the key to the unemployment tool that push wages lower to reduce inflation. That’s the catechism from the RBA high priests.

Notice the word “opinion”. The catechism is no more than an “opinion”, a theory. There are contending theories (see part 2) about the cause of inflation (one of which takes profits-wages very seriously), its effects and its “cure”.

While stagnation persists at the edge of recession, and is at least teetering overseas, the RBA says this:

The outlook remains highly uncertain. Ongoing strength in the labour market, persistent inflation and still-high growth of both labour and non-labour costs suggest there are upside risks to inflation. At the same time, there is a risk that household consumption and economic activity pick up more slowly than expected. The unemployment rate is rising gradually, many households and businesses are under pressure and the lagged effects of monetary policy are uncertain. Conditions in the labour market could deteriorate by more than expected.

If you read carefully that is a schemozzle. Current relatively low unemployment is bad. Improved wages are bad. Working class spending and the production effort to satisfy it are improving too slowly. More of the bad - their policy - will slow it further. Things “could” get worse, just as they are in other connected economies. (The schemozzle continues in a later section that elaborates a bit on the global economy.) 

Later: “higher housing prices” are a good because they support wealth, even though they are probably the most serious problem in the CPI data.

The RBA dodges its special contribution to the inflation problem.

The RBA’s second great silence (after profits) is the money supply. The RBA has the statutory power to print more money, these days using digital technology. How this works needs separate consideration. However, before the pandemic, encouraged/supported by then LNP Treasurer Frydenberg, the RBA unleashed a big increase in money supply, well above the actual value of real goods and services being produced and used in the society. When that happens inflation can get worse or become “sticky”.

Here is a snapshot of the annual growth in the money supply under the control of the RBA.

Money supply increases may not cause inflation but, clearly do not help bring it down. It is an elephant in the RBA’s cloisters.

It is not surprising too much money is NOT for the benefit of the working-class majority.

Although the theory is that economic activity will be stimulated, so far we have stagnation to show for it. Really, it is a gift to those who already have $millions and $billions of accumulated wealth. That minority can engage in all sorts of share, bond and other money trading to enlarge their wealth and control over industries without new productive capacity.

That means the RBA threatens wages and other labour costs must be suppressed to tackle inflation.

The catechism is critical to persuade the majority that private wealth accumulation through exploitation by profit-taking from people and nature is the only way.

Implications for the working-class majority

Our instincts say something different. Let’s trust them and, learn deeply what makes them right and spread our word about it for a new and better system.     

There is no sign that the major capitalist institutions can solve the problems the system creates, some of which get worse when another is “solved”.

Every solution from the RBA, the Productivity Commission, the Treasury, and to a lesser extent the Fair Work Commission and the government protects profit-taking at the expense of the working class and nature. That’s where the focus on productivity becomes a factor. (See previous posts and more to come.)

Working class activists – unionists, feminists and environmentalists – and their organizations, big and small, must improve their critical understanding of how the system creates crises and, at best, can only find a temporary fix here and there that then creates or worsens the problem.

That requires more intense and different learning that is better in effect than what is currently happening.

I discuss that in the next, part 2, of this post. In the meantime here is a discussion about that on Radio 3CR’s “Solidarity Breakfast”, presented by Annie McLoughlin last Saturday, August 3rd.