{"id":1078891,"date":"2023-06-10T14:40:16","date_gmt":"2023-06-10T14:40:16","guid":{"rendered":"https:\/\/jacobin.com\/2023\/06\/reserve-bank-of-australia-interest-rate-hike-inflation-corporate-greed-workers\/"},"modified":"2023-06-10T14:40:16","modified_gmt":"2023-06-10T14:40:16","slug":"raising-interest-rates-wont-stop-inflation","status":"publish","type":"post","link":"https:\/\/radiofree.asia\/2023\/06\/10\/raising-interest-rates-wont-stop-inflation\/","title":{"rendered":"Raising Interest Rates Won\u2019t Stop Inflation"},"content":{"rendered":"\n \n\n\n\n

The Reserve Bank of Australia has raised interest rates again, ostensibly to keep inflation in check. But the reality is that the move will only enrich banks and rich property investors \u2014 at the expense of renters and struggling mortgage holders. <\/h3>\n\n\n
\n \n
\n Signage at the Reserve Bank of Australia (RBA) building in Sydney, Australia, on February 6, 2023. (Brent Lewin \/ Bloomberg via Getty Images)\n <\/figcaption> \n<\/figure>\n\n\n\n\n \n

On Tuesday, the Reserve Bank of Australia (RBA) raised interest rates for the twelfth time in fourteen months. RBA governor Philip Lowe justified the rate rises as an attempt to reduce inflation from the current 6.8 percent to his preferred range of 2 to 3 percent. Lowe, whose term as governor ends in September, heavily implied that this unprecedented run of rate rises will continue throughout 2023.<\/p>\n

The rate rise will overwhelmingly hurt ordinary Australians. Mortgage holders \u2014 the majority of whose loans are on variable rates<\/a> \u2014 will suffer<\/a> directly. Renters will also suffer as landlords pass on the increase to them, exacerbating the cost-of-living crisis<\/a> and putting homeownership even further beyond reach.<\/p>\n

The latest rate rise comes just days after university loans automatically increased by 7.1<\/a> percent<\/u>. Despite the fact that nominal wage growth is only 3.7 percent \u2014 dramatically below inflation \u2014 Lowe insisted that \u201cwe have to make sure that higher inflation doesn\u2019t translate into higher wages for everybody.\u201d<\/p>\n

Perhaps the only positive aspect of the current debate over inflation is that there is a debate at all. Despite the best efforts of big business and the financial press, questions are quietly emerging about exactly who is to blame for rising prices, who should be disciplined to contain them, and how.<\/p>\n\n \n\n \n \n \n

\u201cFor Some Households\u201d<\/h2>\n \n

Lowe admitted that raising interest rates hurts working people. \u201cThe use of this tool comes with complications,\u201d he conceded, noting that<\/p>\n

Its effects are felt unevenly across the community, with rising interest rates causing significant financial pressure for some households. But this unevenness is not a reason to avoid using the tool that we have.<\/p><\/blockquote>\n

By Lowe\u2019s phrasing, \u201cfinancial pressure\u201d sounds almost incidental. In fact this is precisely the point of the tool. The idea is that high costs will scare borrowers, who will limit their spending. Unemployment will increase; by the RBA\u2019s own estimates one hundred thousand people will be thrown out of work. This will reduce employees\u2019 bargaining power and put a downward pressure on wages.<\/p>\n

And most crucially \u2014 although it\u2019s almost always left unsaid \u2014 all of this is then supposed to persuade businesses to stop choosing<\/em> to raise prices so quickly.<\/p>\n

If punishing workers in order to gently make a suggestion to employers seems a harsh way of getting something done, you couldn\u2019t tell from the business response. The financial press used Lowe\u2019s announcement to further attack<\/a> a recent decision by the Fair Work Commission to raise award rates<\/a> by 5.75 percent, even though in real terms, this is a wage cut<\/a>.<\/p>\n\n \n \n \n

A Wage-Price Spiral by Any Other Name . . .<\/h2>\n \n

Peak employer bodies have in part blamed supply-chain issues<\/a> like the war in Ukraine and COVID-19 for rising costs and prices. What they usually fail to mention, however, is that they have already recouped many of the costs associated with these problems from the taxpayer through various<\/a> federally funded subsidies<\/a>.<\/p>\n

This isn\u2019t the only way that employers have manipulated the narrative to maximize profitability. Business groups also maintain that lifting minimum and award wages forces them<\/a> \u201cto make decisions around passing these costs on, so in the end it ends up with consumers who will pay the bill.\u201d In other words, they claim that higher wages lead to higher prices, leading to a \u201cwage-price spiral<\/a>.\u201d<\/p>\n

This is deliberately misleading. Most Australian workers have experienced real wage cuts because they haven\u2019t been pushing for \u2014 or receiving \u2014 wage rises even close to inflation<\/a>. Business groups just imply that workers could<\/em> demand wage increases in line with inflation, claiming that this possibility underpins employers\u2019 choice to raise prices. Unable to point to any actual wage-price spiral, they have invented a hypothetical one. They also blame rising unit-labor costs as a culprit driving inflation. This refers to productivity, a loaded term implying that employees must continuously work harder than previously for the same wages. If they don\u2019t, businesses insist that they are forced to raise prices to avoid any squeeze on profit margins.<\/p>\n

However, businesses\u2019 \u201cour hands are tied\u201d account has not gone totally unchallenged. While still limited in reach, rival explanations for inflation have appeared that propose different, less austerity-driven cures. Like similar debates elsewhere<\/a>, the emergence of alternative, more egalitarian narratives has stirred up a hornet\u2019s nest of orthodox economists.<\/p>\n

For example, the OECD world economic outlook \u2014 published the same day as Lowe\u2019s speech \u2014 suggested<\/a> that the oligopolistic nature of the Australian economy is driving inflation. If a few big companies dominate the market, they can raise prices however much and whenever they like. As the former chair of the Australian Competition and Consumer Commission (ACCC) put it<\/a>, \u201cnothing that they\u2019re doing breaks the law; there\u2019s no law against excessive pricing.\u201d<\/p>\n

In other words, inflation is caused by corporate price gouging<\/a>. This explanation isn\u2019t just more accurate \u2014 it also fits with ordinary Australians\u2019 experience of Woolworths and Coles raising grocery prices arbitrarily<\/a>, or the big four banks refusing<\/a> to pass on rate rises to deposit products.<\/p>\n

The Australia Institute\u2019s Centre for Future Work has suggested a complementary explanation<\/a> that\u2019s even more incendiary, arguing that profits<\/em> are the major cause of the current inflation. In the Centre for Future Work\u2019s account, we\u2019re not in a wage-price spiral, but a profit-price spiral<\/a>.<\/em> It\u2019s the result of Australian companies raising prices across the board as they seek \u2014 and post \u2014 record profits, far beyond any increase in costs they\u2019ve experienced.<\/p>\n\n \n \n \n

The Narrow Road of Political Feasibility<\/h2>\n \n

Confronted with claims that an oligopolistic economy and a profit-price spiral are to blame, orthodox economists have responded tellingly. While acknowledging<\/a> that oligopolies make inflation more likely, the RBA and business lobby have categorically rejected the notion that profiteering is a cause of inflation. Some at the RBA criticized the Centre for Future Work\u2019s methodology. Other economists simply dismissed the question<\/a> as silly.<\/p>\n

For example, according to Richard Holden, a University of New South Wales economics professor, \u201cit doesn\u2019t really matter where the price increases are coming from. Monetary policy has still got to go on.\u201d \u201cA doctor doesn\u2019t care where you got a disease,\u201d agreed Peter Tulip, a former senior RBA researcher. \u201cThe medicine prescription is going to be the same anyway.\u201d<\/p>\n

It appears that to the prescription-happy Dr Tulip, it\u2019s irrelevant whether or not we\u2019ve got the disease at all \u2014 all that matters is that we take his medicine. Business and governments have been prescribing the same thing regardless of what\u2019s happening in the economy. When inflation hovered below 2 percent for the second half of the 2010s, they admonished Australian workers that wage growth was irresponsible, and urged productivity increases. Now we\u2019re facing high inflation, and the advice is identical. There is no suggestion to business that excessive price hikes are irresponsible, or that these need to be accompanied by some action or other that benefits the wider economy.<\/p>\n

In fact there are many possible \u201cprescriptions\u201d that the authorities could consider. Windfall taxes, oligopoly-power reduction, price controls, and direct government investment could all potentially be used to help drive down inflation. None of these suggestions are revolutionary in the slightest.<\/p>\n

The common refrain asserts that these measures are not politically tenable. But to whom? When the government imposed price caps and expanded direct public investment in the energy sector to control inflation, businesses\u2019 grumbling acceptance<\/a> was telling. It demonstrated that business will only tolerate government intervention if it can clearly see the longer-term benefits for itself \u2014 and barely even then<\/a>.<\/p>\n

For now, the RBA and the treasury have correctly wagered that it is more politically feasible to hurt workers than employers. In part, this is because workers are largely unorganized. And even if they were, every industrial tool workers have at their disposal to tilt the situation in their favor \u2014 like striking \u2014 is functionally illegal<\/a>. Employers, by contrast, face few equivalent political or economic constraints; they have carte blanche to retaliate against governments they are unhappy with. And they will continue to use this freedom to transfer Australian wealth upward.<\/p>\n\n \n \n \n\n \n \n \n\n\n

This post was originally published on Jacobin<\/a>. <\/p>","protected":false},"excerpt":{"rendered":"

On Tuesday, the Reserve Bank of Australia (RBA) raised interest rates for the twelfth time in fourteen months. RBA governor Philip Lowe justified the rate rises as an attempt to reduce inflation from the current 6.8 percent to his preferred range of 2 to 3 percent. Lowe, whose term as governor ends in September, heavily [\u2026]<\/p>\n","protected":false},"author":1650,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"_links":{"self":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/1078891"}],"collection":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/users\/1650"}],"replies":[{"embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/comments?post=1078891"}],"version-history":[{"count":1,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/1078891\/revisions"}],"predecessor-version":[{"id":1078892,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/1078891\/revisions\/1078892"}],"wp:attachment":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/media?parent=1078891"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/categories?post=1078891"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/tags?post=1078891"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}