Australian workers are bracing for impact as the Reserve Bank of Australia hiked interest rates on Tuesday, under conditions of high oil prices and threats of a wartime inflation surge. But is there another way to curb inflation that doesn’t force the same stretched households to cut back on spending?
Contagion from an oil crisis is vast, raising prices for fuel, shipping, transportation, manufacturing, agriculture and aviation. Generalised higher prices for energy flow into all production costs. Business then pass higher costs onto consumers in higher prices, protecting profit margins.
But they also tend to do another thing: leverage their powerful position in supply chains to exploit the crisis and widen profit margins. This happened after COVID when “seller’s inflation” saw large corporations increase prices beyond rises in their own production costs. Then it’s a double hit for workers, who pay more for expensive essentials and higher interest on their borrowings.
Treasury has predicted inflation to rise a full percentage point this year into the high-4’s if oil prices average $US120 per barrel for the next three months. In turn, some big banks and corporate economists are frothing for a 1970s-esque “Volcker shock”, calling on the RBA to aggressively hike rates, and on government to cut spending. Between 1979 and 1982, chair of the US Federal Reserve Paul Volcker raised interest rates to nearly 20 per cent in a radical move to curb high inflation following the 1970s oil crisis, intentionally creating a recession.
But there’s no evidence inflation caused by high oil prices can be managed through higher interest rates. The war won’t end and oil supply won’t resume because Australian workers give banks an extra $450 a month.
Analysing the years after the 2022 inflation surge, the IMF found inflation was an average 1.5-percentage points lower in countries whose central banks did not pursue inflation targeting, compared with those that did. Inflation also fell faster in non-inflation-targeting countries.
If the RBA unleashes further painful rate hikes, we risk severely hurting the economy and plunging into recession without reducing inflation at all. This would be disastrous, making real the threat of 1970s stagflation. And it would deepen Australia’s already high levels of economic dependence amid major geopolitical power shifts.
The sense that the government is far from understanding working people’s struggles grows, with One Nation’s populist politics best positioned to capitalise.
The federal government can intervene directly to reduce inflation through targeted cost-of-living support and price regulation, and indirectly through tax reforms that reduce aggregate demand of the wealthiest consumers. And it can do this while protecting living standards, reducing inequality, and building our economic sovereignty.
In the upcoming budget, emergency electricity rebates introduced after the 2022 inflation spike should be reinstated, and childcare made free to reduce major financial pressures on households and their contribution to the Consumer Price Index. This cost-of-living relief could be funded through a windfall profits tax on Australia’s major oil and gas exporters set to clock windfall profits from rising oil and gas prices from the war. Reducing Capital Gains Tax concessions would reduce investor demand for new dwellings, slowing growth in home building costs, another big contributor to inflation.
A more equitable inflation response shares the load. Instead of hitting highly taxed younger workers again and again, wealth taxes like an extreme land wealth levy, as proposed by the McKell Institute, could target high-wealth, high-consuming individuals, reducing aggregate demand, raising at least $3 billion per year for the fight against inflation, making our tax system fairer and more sustainable.
In the medium term, gross power imbalances distorting and raising prices must be tackled. The Food and Grocery Code of Conduct, or the treasurer’s recent letter to the Australian Competition and Consumer Commission warning fuel retailers not to raise prices are mild-mannered gestures that won’t protect Australian businesses and workers from corporations using war as cover to price gouge.
New inflation-combatting legislation requiring companies of high turnover to notify and justify price hikes to a dedicated Prices Tribunal should be introduced. We did this in 1973 under the Prices Justification Act. The tribunal would investigate, report on, and scrutinise prices for goods and services, with big fines imposed for excessive profiteering.
In the fog of war, Australia must consciously plan for a more resilient, independent and prosperous economy. The COVID and 2022 global crises exposed Australia’s heavy reliance on refined fuels, machinery, medical goods, and other high-value manufacturers. Now, we must invest in the future foundations of our economic sovereignty in clean energy and electrification.
As the fossil fuel epoch gasps its last dying breaths, renewable energy will power the new industrial era. Australia is positioned perfectly to become a clean energy superpower, but we need a national public energy provider to get there.
Only a government-owned energy company can leverage cheaper debt through its low credit risk to drive down the cost of energy for critical heavy industry and manufacturing sectors, fast-track renewable energy projects, make power bills cheaper, and create thousands of high-paying skilled jobs for generations to come.
By attacking inflation more equitably, and planning for our own future, Australia won’t just survive the tumultuous recalibration of geopolitics. We’ll get the leverage and economic foundations needed to emerge from the conflict better than how we came in.
Alison Pennington is chief economist at the McKell Institute.
