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Tag: Greg Jericho Chief Economist

  • When the prices of necessities are rising fast, the RBA does not need to hit households with another rate rise

    When the prices of necessities are rising fast, the RBA does not need to hit households with another rate rise

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on November 2, 2023

    Cost of living rose by more than inflation because of interest rate rises. Another rate rise would only cause more unnecessary pain.

    In the past week, the likelihood of the Reserve Bank raising the cash rate to 4.35% has gone from about 20% prior to last week’s inflation figures coming out, to now an even-money bet.

    But when you look at the cost of living figures out this week it is clear that households are already having to reduce their spending on non-discretionary items.

    Out of the 14 biggest contributors to inflation, 10 were non-discretionary items.

    At this point we should note the comments of the secretary of the Treasury, Steven Kennedy, last week in Senate estimates. He was asked about the pathway to a “soft landing” – ie where inflation falls without us going into a recession.

    He noted that chances of a soft landing were made harder by recent rises in oil prices because “on the one hand, it will increase headline inflation by raising petrol prices. On the other hand, it may well reduce growth and see other prices fall because people have less to spend. At least in the short term, expenditure on petrol is not very discretionary.”

    When the prices of things you can’t avoid paying for rise faster than others, then that obviously reduces your ability to spend elsewhere. In this way petrol, electricity and rental price rises have the same impact as do interest rate rises.

    The most recent figures of the volume of retail spending will come out tomorrow, but we know that the volume has been falling, and is now back to pre-pandemic trend levels:

    This of course is what you would expect – when the cost of non-retail items such as petrol, mortgages, rents, electricity, property rates, medical services and insurance are rising, you are going to buy less in the shops.

    Since March last year the cost of mortgages has gone up 114%. Does the Reserve Bank think households haven’t really noticed that?

    Even you if discount the record low rates during the pandemic, the cost of mortgages is now about 70% higher than it was at the end of 2019. Since then, wages have risen only about 10.5%.

    Another rate rise is not going to do anything other than add to the cost of necessities. It would not so much reduce inflation as increase the cost of living and hit households whose wages and incomes continue to be worth less than they were a year ago.


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  • The Reserve Bank should not raise rates on Melbourne Cup Day

    The Reserve Bank should not raise rates on Melbourne Cup Day

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on October 26, 2023

    Inflation is being driven by things unaffected by interest rate, so there is no reason for the RBA to raise rates in November

    The latest CPI figures showed inflation grew 5.4%, down from 6% in the June quarter and almost a third below the peak of 7.8% at the end of last year. And yet commentators seem desperate for the Reserve Bank of Australia to raise interest rates next month to show it is tough on inflation. But raising rates now would not be tough, it would just be cruel.

    The annual growth of inflation is falling quite quickly – down from 7.8% at the end of last year. But because the quarterly growth of inflation rose in the September quarter, a numbe rof commentators and economists have been suggesting that the Reserve Bank should raise interest rates in two months.

    But when you examine the drivers of inflation in the September quarter, there is little that would have an impact from higher interest rates.

    Automotive fuel prices accounted for 20% of the growth in inflation in September – that is completely unaffected by rate rises given that it was all due to higher world oil prices due to OPECD restricting supply. Similarly rental prices, electricity, property rates and charges, insurance, tobacco and beer prices have nothing to do with interest rates. Even the cost of building a new home is driven mostly by the increased cost of construction materials from overseas.

    Crucially in the September quarter the cost of “non-discretionary item” rose 1.4% while the cost of “discretionary” item rose just 0.7%. Non-discretionary items are things which you cannot avoid paying (at least in the short-term). In effect those price rises have the same impact on consumer spending as do rate rises – they reduce the ability of people to spend money on things in shops and on discretionary services.

    Had the RBA raised interest rates more in the September quarter there would have been negligible impact on the main drivers of inflation, raising them in November due to these latest figures would just be cruel and hurting people whose real wages continue to fall.


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  • Australia is an energy super power, we need to use that power for good

    Australia is an energy super power, we need to use that power for good

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on October 19, 2023

    Australia is already an energy superpower, but our governments have lacked the courage to use that power to reduce greenhouse gas emissions

    As the Australian Government continues to pursue policies notionally designed to reduce our greenhouse gas emissions, a great store has been placed in Australia becoming a “renewable energy superpower”. However as Labour Market and Fiscal Policy Director, Greg Jericho, notes in his Guardian Australia column, Australia already is an energy superpower. But we fail to use that power for good.

    Australia is either the world’s largest or second-largest exporter of metallurgical coal, thermal coal and LNG. And yet we have not sought to use this power to pursue policies that would reduce demand for fossil fuels and transition the world towards renewable energy. Instead, we placate mining companies and give no timeline to end coal and gas use. We continue to approve new coal mines and fail to insert a climate-change trigger into environment protection legislation that determines whether new mines can be approved.

    Given September this year was the hottest September on record, after August this year being the hottest August on record, July this year being the hottest July on record and June this year being the hottest June on record, the time for action that reduces Australia’s and the world’s emissions is urgent and critical.

    Climate change is one area where Australia can legitimately take a leading role in global affairs, our power as an energy producer and supplier of fossil fuels which continue to exacerbate climate change demands we show this leadership.

    For too long Australian governments have cowered before mining companies, now it’s the time to realise we have the minerals they want now and in the future when renewable energy becomes the dominant power and thus we can dictate terms.

    Leadership requires the grasping of power and using it for good.


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    Dutton’s nuclear push will cost renewable jobs

    by Charlie Joyce

    Dutton’s nuclear push will cost renewable jobs As Australia’s federal election campaign has finally begun, opposition leader Peter Dutton’s proposal to spend hundreds of billions in public money to build seven nuclear power plants across the country has been carefully scrutinized. The technological unfeasibility, staggering cost, and scant detail of the Coalition’s nuclear proposal have

    Australia’s Gas Use On The Slide

    by Ketan Joshi

    The Federal Government has released a new report that includes projections of how much gas Australia is set to use over the coming decades. There is no ambiguity in its message: Australia reached peak gas years ago, and it’s all downhill from here:

  • The latest report from the IMF highlights the need for full-employment to be the aim of the government and the Reserve Bank

    The latest report from the IMF highlights the need for full-employment to be the aim of the government and the Reserve Bank

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on October 12, 2023

    If the economy grows as slowly as the IMF predicts it will for the next 2 years, Australia will be lucky to avoid a recession.

    The IMF’s latest World Economic Outlook is mostly framed around trying to thread the needle of reducing inflation and cost of living rises and not crashing the economy while doing so.

    And while overall the IMF suggests the world economy is in for a “soft landing” the picture it paints for Australia is of a tough year ahead. Policy director Greg Jericho notes in his Guardian Australia column that the IMF has downgraded its expectation for growth next year from an already bad 1.7% to a historically awful 1.2%.

    Were Australia’s economy to grow this slowly through the year and avoid a recession it would be the first time that has happened. The IMF also predicts that 2025 will grow by just 2.0%. Were that to occur, it would be the first time on record that Australia’s economy has gone 3 consecutive calendar years without growth above 2%. That is hardly a “soft landing”

    The IMF also now predict unemployment will rise quicker than it expected would be the case in its previous outlook in April.

    The report highlights the need for the government and the Reserve Bank to work to deliver full employment. The current settings have the nation on course to grow so slowly for so long that the risk of the economy stalling are rising precipitously.


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  • Inflation remains headed in the right direction despite higher oil prices

    Inflation remains headed in the right direction despite higher oil prices

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on September 28, 2023

    Increases in the prices of commodities like oil and gas are not a reason for the RBA to raise interest rates next week

    The latest monthly CPI figures out on Wednesday showed a slight increase in the annual growth of inflation, but policy director Greg Jericho writes in his Guardian Australia column that the Reserve Bank should not use it as an excuse to raise rates next week.

    While CPI rose from 4.9% to 5.2%, the monthly figures can be quite erratic and thus it is best to also take note of the measure that excludes volatile items and holiday travel (which can exaggerate movement son a monthly basis). On this measure, annual inflation feel from 5.8% to 5.5%.

    The big driver of inflation in August was a 9% jump in automotive fuel prices. And indeed much of the inflation over the past 2 years has come from overseas increases in world prices of commodities and of course companies taking advantage to increase profit margins.

    The latest figures show that once again there is very little that the RBA can do to limit these price rises. While a higher exchange rate might ameliorate some of the increases, it is always foolish for the RBA to attempt to increase the value of the dollar by raising interest rates. Any changes in the value of the exchange rate due to another rate rise would likely be small and temporary.

    The new Governor of the RBA, Michele Bullock should recommend the RBA board look through the monthly movements of the CPI and note that inflation here is following largely the same path as that in the rest of the OECD. Raising rates now would only serve to punish households for an increase in prices that had no link with wages or the level of demand in Australia economy.


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  • Opening statement to the ACTU Price Gouging Inquiry

    Opening statement to the ACTU Price Gouging Inquiry

    by Jim Stanford and Greg Jericho

    Jim Stanford

    Greg Jericho

    Chief Economist

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    This week Professor Allan Fels, the former head of the Australian Competition and Consumer Commission (ACCC), has begun an inquiry into price gouging across a range of industries, including banks, insurance companies, supermarkets, and energy providers. The inquiry commissioned by the ACTU comes off the back of the highest inflation in 30 years and the biggest falls in real wages on record.

    The Director of the Centre for Future Work, Jim Stanford and policy director and chief economist of the Australia Institute, Greg Jericho, presented evidence at the inquiry based on their research into profit-led inflation. Below is an edited excerpt of their opening statement.

    The recent period of rising inflation has been highly unusual coming as it has after a period where in Australia, core inflation by June 2021 had not been above the Reserve Bank’s target range of 2% to 3% for more than a decade and had been below 2% for five and half years.

    Perhaps unsurprisingly, because of such a long period without rising inflation, we saw very much a default to the thinking of the 1970s and a belief that all inflation is primarily driven by demand factors that need to be limited by higher interest rates.

    This was a fundamental misunderstanding of this inflationary period. It clearly could not be driven by wages because wages at all stages over the past two years have grown on average by less than inflation, such that real wages are now 5.5% below what they were two years ago.

    Wage growth in the 12 months to June this year was just 3.6%, still well below the CPI of 6%, and far from accelerating, actually had fallen from 3.7% growth in the 12 months to March.

    Thus, the question becomes, if not wages, what?

    Our research in February this year revealed that the initial surge of inflation in Australia beginning in mid-2021 was closely associated with a surge in price pressures.

    Business profits were the dominant manifestation of that inflation. The supply shocks that occurred because of the pandemic lockdowns and Russia’s invasion of Ukraine allowed companies in some key industries (such as energy, logistics, and manufacturing) to significantly boost their profit margins, coincident with rising prices.

    Our February 2023 paper, using the decomposition method of the national accounts (as explained by Jim), concluded that since the end of 2019, 69% of unit price increases over and above the RBA’s 2.5% inflation target mid-point were attributable to increased nominal unit profit payments. Only 18% was attributable to higher nominal unit labour costs, and the rest to increases in other nominal factor payments.

    Our paper noted that the profit growth was most dramatic in the energy and resources sector. These findings were broadly consistent with the findings of earlier research by the Australia Institute, as well as with the similar decompositions of inflation reported in other countries.

    Our follow-up report in April confirmed the leading role played by profits in the energy and resource industries. It noted that products from that sector (including petrol, gas, and other fossil fuel-intensive products) were leading sources of domestic inflation in Australia. It also showed that profits in other sectors, such as wholesale trade (56%), manufacturing (38%), professional and technological services (37%) and construction (37%), had also increased as a share of non-mining GDP since the pandemic. This profit growth is not dissimilar from the 48% growth in mining profits during the same period and well in excess of the 27% increase in nominal GDP.

    This confirmed that firms across these sectors have more than simply passed on higher input costs to consumers. As American economist Isabelle Weber has argued, they amplified them.

    The release of two more quarters of national accounts since February allows us to update our figures, which find that despite recent falls in corporate profits in some sectors, higher unit profit payouts still account for over half (56%) of the cumulative increase in nominal unit prices in the Australian economy since December 2019, above and beyond what would be expected due to normal target inflation. The role of higher unit labour costs in overall unit prices has increased in recent quarters and now accounts for just over one-third (35%) of the cumulative above-target rise in prices since the pandemic.

    The influence of profits is clear when you consider that unit profit costs by June 2023 were 27% above their December 2019 levels (down from 37% above in March 2023), while unit labour costs are just 14% above December 2019 levels – pointedly just below the 15% growth in CPI.

    There have been some suggestions by the Reserve Bank and others that our research should exclude mining profits as these do not significantly influence Australian inflation. Profits in mining during this time accounted for over half of all corporate profits in Australia; obviously, if over half of corporate profits are excluded from consideration, then profits will obviously seem less important.

    We reject the argument that mining profits somehow “don’t count” – especially in regard to domestic inflation, given the critical role played by higher petrol, gas, and electricity prices in driving the initial post-pandemic surge in Australian consumer price inflation.

    Clearly, there is a strong connection between energy prices, energy industry profits, and inflation experienced by domestic consumers (not to mention inflation experienced in other sectors of the economy).

    The good news is that corporate profits have begun to moderate in the first half of this year. It is important to note the modest decline in gross operating surplus in some sectors has still left corporate profits as a share of national GDP well above pre-pandemic levels and far above longer-term post-war averages.

    Nevertheless, even the partial moderation of record corporate profits has been associated with a significant and welcome deceleration of inflation. Consumer price inflation in Australia has slowed by over half in the last nine months: from an annualised peak of 8.9% in the first quarter of 2022 (led by surging energy costs) to just 3.4% in the June quarter of 2023 (not much higher than the top of the RBA’s target range).

    Moreover, even in the later stages of this current inflation cycle, with profits stable or even falling and labour costs accelerating, it’s wrong to conclude that labour is now the ‘source’ of inflation: clearly, the rise in unit labour costs reflects efforts by workers to recoup real income losses experienced earlier in the inflationary cycle, which must still be ascribed to the initial profit-led shocks that started the whole process.

    Blaming workers now for inflation because they are pursuing higher wages to recover lost living standards is like blaming a homeowner whose house has been set on fire for using too much water to put out the flames.

    Even as it appears to be moderating, this period of inflation requires a rethink of our policy approaches.

    We have made a number of policy recommendations, including:

    • Price regulations in strategic sectors
    • Fiscal transfers (such as windfall profits taxes combined with cost-of-living transfers to vulnerable households)
    • Competition policy reforms
    • Supports for wage increases in excess of current inflation for a sustained period of time to allow the repair of recent real wage reductions.

    The biggest lesson from this period is that we need more policy tools in our inflation toolkit. Relying on monetary policy and higher interest rates only works if you think inflation is only ever produced by higher wages and strong aggregate demand.

    We know that the future is more likely than not to feature further global shocks – not the least from climate change. Policymakers and central banks need to learn from the past two years and ready themselves to treat the broader causes of inflation and protect workers and households when companies seek to use crises as an opportunity to lift prices.


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    Centre For Future Work to evolve into standalone entity

    The Centre for Future Work was established by the Australia Institute in 2016 to conduct and publish progressive economic research on work, employment, and labour markets. Supported by the Australian Union movement, the centre produced cutting edge research and led the national conversation on economic issues facing working people: including the future of jobs, wages

  • Profit-Price Inflation: Theory, International Evidence, and Policy Implications

    Macroeconomics, Unions & Collective Bargaining, Wages & Entitlements

    Profit-Price Inflation: Theory, International Evidence, and Policy Implications

    Profits need to come down to reduce inflation and allow real wages to recover
    by Jim Stanford, Richard Denniss, Matt Grudnoff, Greg Jericho, David Richardson and Matt Saunders

    Authors

    Jim Stanford

    Richard Denniss

    co-Chief Executive Officer

    Matt Grudnoff

    Senior Economist

    Greg Jericho

    Chief Economist

    David Richardson

    Senior Research Fellow

    Matt Saunders

    Senior Economist

    Media release



    Corporate Profits Must Take Hit to Save Workers

    New research confirms that corporate profits in Australia, despite recent moderation, remain well above historic norms, and must fall further in order to allow a rebuilding of real wages in Australia that have been badly damaged by recent inflation.

    The report, compiled by Dr Jim Stanford (Economist and Director of the Centre for Future Work), with contributions from several other economists at the Centre and the Australia Institute, confirms that higher corporate profits still account for most of the rise in economy-wide unit prices in Australia since the pandemic struck.

    The good news is that corporate profits have begun to moderate, as global supply chains are repaired, shortages of strategic commodities dissipate, and consumer purchasing patterns adjust after the pandemic. This has occurred alongside a reduction in inflation of over half since early 2022 (falling from a peak of 8.9% annualised in early 2022 to 3.4% by June 2023). This further confirms the close correlation between corporate profits and inflation — but both profits and inflation need to fall further.

    The report also reviews the methodology and findings of over 35 international studies confirming the existence of profit-led inflation across many industrial countries (including Australia). The methodology and findings of these studies are very similar to that utilised by the Australian Institute and the Centre for Future Work in previous research on profit-led inflation.

    The international research includes reports from numerous established institutions (including the OECD, the IMF, the Bank for International Settlements, many central banks, and the European Commission). Using similar methodology, these institutions came to similar conclusions: namely, that historically high corporate profits were the dominant factor in the initial surge of global inflation after COVID.

    The report was submitted on 21 September as evidence to the ACTU’s Price-Gouging Inquiry, headed by Prof Allan Fels. This Inquiry is gathering documentary evidence on how Australian workers and consumers have faced exploitive and unfair pricing practices by Australian corporations, which have added to recent inflation and undermined real wages. The new report provides macroeconomic evidence confirming the relevance of the Inquiry’s terms of reference.

    Policy-makers in other countries (including Europe and the U.S.) agree that corporate profit margins need to fall further in order to continue reducing inflation, while allowing real wages to recover to pre-pandemic levels. The new report shows this is also true in Australia. Average real wages are presently 6% lower than in mid-2021 (when post-pandemic inflation broke out, led by higher prices and corresponding super-profits in strategic industries like energy, manufacturing, and transportation).

    Wages will thus have to grow significantly faster than inflation for a sustained period of time to recoup those losses. That can occur while still reducing inflation if historically high profit margins are reduced to traditional levels.



    Full report




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  • The weak economy shows the Reserve Bank is not threading the needle

    The weak economy shows the Reserve Bank is not threading the needle

    by Greg Jericho

    Greg Jericho

    Chief Economist

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    We have now had two consecutive quarters of GDP per capita falling – hardly the soft landing the RBA wants.

    The latest June quarter National Accounts released yesterday showed that without the increase in population, Australia’s economy would have shrunk for two consecutive quarters. This, as Policy Director, Greg Jericho writes in his Guardian Australia column, reveals just how weak our economy is, and how massively households have been hit by the 400 basis points rise in the cash rate.

    The Reserve Bank has talked about trying to thread the needle of lowering inflation and delivering a soft landing. But with GDP per capita falling and real household disposable income per capita now 5% below where it was a year ago, it is becoming harder to suggest the RBA has achieved its aim.

    Even when including population growth GDP only rose at all because of government spending and investment. The private sector is struggling as companies run down their inventories rather than build up supplies in the hopes of increased sales in the months to come.

    The household savings ratio is now as low as it has been since the GFC as households do what they can to pay the costs of essential items and reduce their purchase of discretionary goods and services.

    The Reserve Bank sought to dampen demand from a misguided view that demand was driving inflation. Instead, we know that inflation has largely been driven by international prices and costs and from companies taking advantage of the situation to increase their profits.

    Rather than focus purely on inflation the RBA and the government now need to be most wary of rises in unemployment. We are not in a recession yet, but should the economy continue to fail to grow aside from population unemployment will inevitably rise, and the cost of the RBA’s strategy will be felt even more so by households across the country.


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    Centre For Future Work to evolve into standalone entity

    The Centre for Future Work was established by the Australia Institute in 2016 to conduct and publish progressive economic research on work, employment, and labour markets. Supported by the Australian Union movement, the centre produced cutting edge research and led the national conversation on economic issues facing working people: including the future of jobs, wages

  • Australia’s emissions are rising at a time they need to fall quickly

    Australia’s emissions are rising at a time they need to fall quickly

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on August 31, 2023

    The latest quarterly greenhouse gas emissions survey shows that Australia is heading in the wrong direction – and that needs calling out.

    The latest Quarterly Greenhouse Gas Emissions data came and went last Friday with little coverage. As Policy Director, Greg Jericho writes in his Guardian Australia column this meant that much of the terrible news was missed.

    In the past year, Australia’s greenhouse gas emissions have increased with the rise in transport emissions undoing any of the good that comes from falling emissions out of the electricity sector. At a time when we should be on a clear path to reducing emissions by at least 43% below the 2005 level by 2030, we are heading in the opposite direction.

    The figures also highlight the weakness of our 2030 target. The only reason we are even halfway to achieving that cut is because Australia includes land use in its calculations. Without including the faux cuts in emissions that come from using 2005 and the massive land-clearing that occurred that year as a baseline, Australia’s emissions would be just 1.6% below 2005 levels.

    Next week the June quarter GDP figures will be released.  We know exactly when they will be released and they will receive massive coverage, including a press conference by the Treasurer soon after 11:30am on Wednesday. By contrast, the quarterly greenhouse gas emissions data is released at random times with now warning and without any minister fronting media to discuss, explain and defend the government’s policies.

    We need to treat the greenhouse gas emissions release with the same level of attention we give to GDP, and we need to demand what the government is doing to ensure in 3 months time with the next release the figures will show a fall, rather than a rise.


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    Dutton’s nuclear push will cost renewable jobs

    by Charlie Joyce

    Dutton’s nuclear push will cost renewable jobs As Australia’s federal election campaign has finally begun, opposition leader Peter Dutton’s proposal to spend hundreds of billions in public money to build seven nuclear power plants across the country has been carefully scrutinized. The technological unfeasibility, staggering cost, and scant detail of the Coalition’s nuclear proposal have

  • For most workers, wages are still failing to keep up with inflation

    For most workers, wages are still failing to keep up with inflation

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on August 17, 2023

    While overall wages grew in line with inflation in the June quarter for workers in most industries real wages are still going backwards.

    The best news from the June quarter wage price index is that average wages rose 0.8% – the same as inflation. This means that after 11 consecutive quarters, real wages have finally stopped falling.

    That is the good news, but as Policy Director, Greg Jericho noted in his Guardian Australia column, for most workers real-wages kept falling. Only good wage growth in construction, mining, transport and warehousing, and the utility industries enabled the overall growth to be equal with inflation. For workers in all other industries, real wages kept falling.

    And for all workers, real wages in the past year have fallen sharply and are around 5.4% below where they were before the pandemic.

    These latest figures only serve to reinforce that wages are not driving inflation and there is no sign at all of a wages breakout. Indeed, annual wage growth fell in the June quarter to 3.6% from 3.7%.

    It highlights that we do not need unemployment to rise to 4.5% in order for inflation to get under the RBA’s 3% target ceiling. The current rate is more than consistent with long-term inflation of between 2% and 3%. Any further efforts to raise unemployment by increased interest rates would only hurt workers and households for no benefit.


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