This could well be the crucial week in this year’s election campaign.
On Wednesday, we’ll get the inflation figures. And, if as expected, they show a dramatic leap in the cost of living, there’s a chance that it could force the Reserve Bank of Australia to hike interest rates right before the May 21 poll.
It’s a slim chance, admittedly, because the RBA doesn’t interfere in the political process and doesn’t want to be seen to be doing so.
However, that principle cuts both ways. As a body independent of politics, it has a duty to act in the national interest, regardless of a looming election.
It wouldn’t be the first time it has happened.
Back in 2007, a little over a fortnight before John Howard’s Coalition government was swept from power, the RBA hiked rates in a bid to cool an economy threatening to overheat from the combined effects of a resources boom and government largesse.
To a large extent, it’s purely academic. If the first rate hike doesn’t arrive three weeks before the upcoming election, it more than likely will land just 10 days after whichever party gains power.
Make no mistake, the RBA is coming under increasing pressure to act, and soon. The US already has hiked rates and is likely to push through a double rise next week. Both Canada and New Zealand, in recent weeks, have snuck through two hikes in one go.
Everywhere, the issue is the same: Inflation is running wild. Initially fuelled by a faster-than-expected recovery from the pandemic, following huge amounts of monetary and fiscal stimulus, it was exacerbated by production shortages and logistics problems.
Then came the war in Ukraine, and the resulting disruption to global trade in energy, grain and minerals has thrown an accelerant on that blaze.
Inflationary pressures building
Unlike many developed nations, we gather our inflation numbers just four times a year, instead of every month.
That makes life tough for our central bank, given one of its primary roles is to keep inflation in check.
Not surprisingly, many interest rate movement decisions have tended to come in the meeting immediately after the data release.
That’s why the RBA acted on Melbourne Cup Day, just before the 2007 election. In fact, given so many rate move decisions have occurred just before the horses hit the track at Flemington, the first Tuesday of November is often jokingly referred to as “the rates that stopped the nation”.
Cost-of-living pressures are looming as a key election flashpoint in this campaign. Fuel prices have been soaring and businesses have been struggling to keep a lid on price rises, some of which now are being passed through.
Westpac economists have crunched the numbers and reckon we’ll see a 2 per cent rise in prices between New Year’s Day and the end of March.
That will boost consumer price growth to a frightening 4.9 per cent on an annual basis, the highest in 15 years.
Even after stripping out some volatile elements from the data, core inflation is likely to come in at about 3.4 per cent. That’s way above the RBA’s Goldilocks band of between 2 and 3 per cent.
Even more alarming, one of the major concerns is the way the price rises are accelerating. During the past six months, core inflation likely has risen at an annualised 4.4 per cent.
Housing is where much of the pain is being experienced, closely followed by transport, fuel and vehicles. Then there is food and education. All these areas are key household spending items.
According to Westpac’s Justin Smirk, there are hardly any areas where prices have dropped.
“This is unusual … and is indicative of a more-aggressive inflationary pulse than we have become used to,” he noted.
Economic management myth
You are going to hear a great deal about “superior economic management” over the next few weeks. The problem is, most of it will be garbage.
Forget all the complex theories and mathematical equations, good economic management boils down to two pretty simple principles.
When the economy is slowing down, you give the accelerator a touch. And when it looks as though things are overheating, you apply the brakes. And that’s largely it.
There are two main policy instruments that can be used to achieve this.
One is monetary policy, which is controlled by the Reserve Bank and over which the federal government has no sway. It adjusts the amount of money running through the system, usually by altering the price of cash or the interest rate.
The other is fiscal policy. Governments can affect the amount of cash in the economy in two ways: by altering the amount of tax they raise, or through spending programs. During a contraction, you run a deficit. And in boom times, you rack up a surplus.
Ideally, the central bank and government policy should work hand in hand.
During the past 50 years, however, governments largely surrendered economic management to central banks. Instead, they committed themselves to lower taxes and less spending to get out of the way of the economy.
Instead of targeting a balanced budget over the medium-to-long term — to ensure steady and moderate growth — “good economic management” became a contest for who could achieve the biggest surplus over the longest period, regardless of how the economy was travelling.
It was a simple mantra: surplus good, deficit and debt bad.
Ultimately, it caught up with former prime minister John Howard. Having enjoyed the fruits of a resources boom and, after selling off assets such as Telstra, he dug into the accumulated surplus during the 2007 election, offering permanent tax cuts to the electorate in a bid to win over the electorate.
Rather than argue that the government should be pulling in the same direction as the RBA — which had raised rates just a few months before — the opposition matched the tax-cut plans.
Ultimately, that undermined the federal budget, creating a structural deficit once the global financial crisis hit.
With an economy already running hot, all that extra cash being splashed around would only add even more juice.
The Reserve Bank was left with no alternative but to hike rates right before the election.
Could it happen again?
Once again, we have the economy on a tear. Unemployment is at the lowest in almost 30 years and inflation — after years of lying dormant — is surging.
A lot of that is down to government spending. The Morrison government threw its decades-old surplus ethos out the window when the pandemic hit. And rightly so.
It pumped more than $343 billion in health and economic stimulus into the economy to stave off the worst downturn in a century.
The RBA was on the same page, slashing rates to a record 0.1 per cent low and injecting almost $340 billion worth of newly minted cash into the economy.
It was a rare example, at least in recent times, of monetary and fiscal policy operating in lock step.
Not any longer. While the RBA has done a quick about-face — it has warned that rate rises are imminent — both sides of politics have hit the campaign trail with promises of extra spending.
In the most recent budget — brought forward as a prelude to the election — the Coalition committed billions of extra dollars to petrol price relief, infrastructure, extended tax cuts and other sweeteners.
And, with the massive stage three of the personal income tax cuts slated to begin in 2024 — at a cost of $18 billion in the first year and at least a decade of deficits ahead of us — our fiscal policy will remain loose.
That’s fine if growth suddenly takes a turn for the worse. However, if the recovery continues at this pace, it will force the RBA to raise rates higher and faster than it otherwise would need to.