Increases in the price level (nowadays referred to as “inflation”) are embedding themselves across much of the world. And I would like to emphasise that it’s not just a money-supply thing. It is essentially caused by the growth of purchasing power relative to the growth in the amount of goods and services available for purchase. The key element is productivity growth relative to the level of spending.
I’m not interested in dwelling on any of this, other than to point out that getting inflation back down to zero hardly fixes the problem. Here are the latest data from the ABS:
- The Consumer Price Index (CPI) rose 2.1% this quarter.
- Over the twelve months to the March 2022 quarter, the CPI rose 5.1%.
- The most significant price rises were New dwelling purchase by owner-occupiers (+5.7%) and Automotive fuel (+11.0%).
Suppose the growth rate went down to zero from 5.1%, which it won’t any time soon, if ever. Since the CPI figure is a percentage change in the index you have not recovered your lost purchasing power.
Most extraordinarily to me, the ABS only just mentions the latest index number, which is 123.9. The publication, so far as I could see, doesn’t even mention the index level a year ago which I calculate to have been 117.9.
The point: unless the Index falls back to 117.9, a zero inflation rate still leaves you 5.1% behind.
It is people on fixed incomes who will be really punished, but everyone who has not had their incomes rise by that 5.1% will be financially worse off.
So we now have all the ingredients of a wage-price spiral. This is what Labor has promised: ‘Absolutely’: Albanese backs wage growth at rate of inflation.
“I believe the minimum wage should at least keep up with the cost of living,” Albanese told a press conference in the Melbourne seat of Chisholm on Tuesday morning.
Productivity has fallen backwards since the lockdowns and the covid restrictions. Governments everywhere – see Victoria specially – have thrown away billions of dollars on useless unproductive projects. (The US has gone absolutely insane.)
Put in place a system that adjusts wages to the movement in prices and the disaster that will follow will still be with us twenty years from now.