Inflation isn’t a wages issue and the Reserve Bank knows it

The blokes in suits from the Reserve Bank of Australia (RBA) are not always the smartest guys in the room. This might come as a shock to them when hubris is their calling card.

Take RBA Governor Philip Lowe. Last November, Governor Lowe was playing to a hometown crowd, addressing a gathering of the Australian Business Economists (ABE).

As he polished his fiscal crystal ball and stared into the future, Governor Lowe saw a world of benign interest rates within the RBA’s target range of 2 to 3 per cent and inflation kept in check. Serenity now, according to Australia’s top banker.

“Our central scenario is that underlying inflation reaches the middle of the target by the end of 2023,” he said.

“If this comes to pass, it would be the first time in nearly seven years that we will be at the mid-point. This, by itself, does not warrant an increase in the cash rate. It is still plausible that the first increase in the cash rate will not be before 2024,” Lowe said.

Within six months of this bold prediction, interest rates had begun galloping away like a Melbourne Cup hopeful. The RBA increased rates for the first time in 12 years in the middle of a federal election campaign.

Two more rate rises would follow, half a percentage point each. The expectation is there will be more to come.

Philip Lowe described his interest rate prediction as “an embarrassing error”.

Yet, the RBA Governor wasn’t deterred from making public pronouncements about what it is that has sent the Australian economy into a tailspin.

In late June, Lowe went retro, invoking the 1970s, claiming that wages growth must be restrained to contain the surging inflation (which he didn’t see coming).

The RBA Governor was trying to sell in the idea that pay rises should be capped at 3.5 per cent, which is half of the 7 per cent inflation forecast for the end of this year, to avoid a 1970s -style wage-price spiral.

In effect, Lowe was advocating for a real wage cut for workers (not his own pay packet though) order to clean up the economy.

ACTU Secretary Sally McManus dismissed Lowe’s comments in classic style, suggesting the RBA was stuck in a “boomer fantasy land.”

To underline how off beam the RBA Governor is, the minutes from the Reserve Bank recent board meeting on July 5 show that it is businesses passing on price increases that is a key contributor to inflation, and not wage growth.

The RBA board minutes noted that companies “had indicated a greater propensity to pass through cost increases to consumer prices. As a result of these price pressures, inflation was expected to increase in year-ended terms through the remainder of 2022.”

This revelation followed on from the findings of the latest research from The Australia Institute, which showed that profits, not wages are the key driver of Australia’s inflation break out.

Unlike the smart guys in suits, McManus is not in the business of making predictions. She is, however, in the business of talking straight.

“Big businesses are pocketing record profits, while passing on price rises to consumers and refusing to grant real pay rises for workers,” McManus said.

“Working Australians could, and should, be getting their fair share of the economic recovery. Instead, the recovery is being siphoned into offshore bank accounts and record CEO bonuses.”

“If working Australians don’t have money to spend on basics, they are not going to spend on discretionary items. These minutes from the RBA show that they agree – low wage growth and low spending is a brake on the economy,” she said.

Maybe the smart guys in suits at the RBA could trade in the crystal ball and spend more time listening to workers.

That would finally be a smart move.