Inflation risks are overstated

Anyone who listened to new Labor Federal Treasurer Jim Chalmers talk about rising inflation would be forgiven for thinking he had just discovered fire.

Chalmers, like a deer in the headlights, speaks of sadness and unhappiness about rising inflation caused by, as he likes to say, a lost decade.

Of course, the blame is diverted to the former coalition government which was, of course, directly responsible for the global pandemic and the outbreak of war in Ukraine.

Everyone knows that the prices of everything from carrots to cars have gone up, especially in the last 12 months.

It’s amazing what a global pandemic, war in Europe and systematic supply chain shortages can do to the price and delivery of goods and services.

Economics 101 predicts that inflation is caused either by supply and demand or by cost pressures.

Where demand exceeds supply, the price increases.

If the cost of production increases, the price of goods and services increases.

Labour’s solution to these inflationary pressures – which are happening around the world – is to try to force pay rises on employers who are already struggling to recover from the pandemic, managing staff shortages and disruptions to the supply chain.

Add to that the increases in electricity and fuel prices and it’s a perfect storm.

While wage increases seem like a good idea, at times like these they actually fuel the inflationary fire by further increasing supply and demand pressures as well as production costs.

The last time the world saw similar spikes in inflation was in the 1970s, sparked by OPEC’s global oil supply restriction, which led to global fuel price shocks .

Governments around the world have taken steps to avoid being completely dependent on international fuel sources.

The lessons learned in the 1970s are now forgotten and Australia, like the rest of the world, is passing on the price.

Governments can take many steps to try to counter rising inflation, but only if the causes of inflation can be brought under control.

If you take out the global pandemic and the war in Ukraine – Australia’s inflation rate would be around 2% as it was in 2019 – before Covid-19. Inflation is expected to reach 7.7% by the end of the year, but decline to 2.75% by 2024.

One of the biggest risks for Australia is the knee-jerk reaction to inflationary pressures that has led the Reserve Bank to raise interest rates, which will put further downward pressure on investment and growth.

Monetary policy measures only work when global supply chains are working properly – at the moment they are anything but.

Our next biggest risk is every time Jim Chalmers opens his mouth and talks about our economy and his ability to manage it.