Australia’s latest inflation figures are proof that the Reserve Bank has “increased interest rates too far” and the hikes have been largely ineffective in bringing down inflation.
Inflation is decelerating according to the latest figures from 6 per cent in the year to June, down from 7 per cent in March.
Deloitte Access Economics warns the latest data confirms what the Reserve Bank’s own research shows – excessive inflation in Australia has mostly been caused by supply side factors.
The best way of thinking about supply side factors is the disruption to supply chains during the pandemic that caused the price of goods to rise because of shortages.
Traditionally, inflation has been caused by more jobs and higher wages and increased household incomes that lead to a rise in consumer spending.
While supply chain blockages have eased since the pandemic, the Ukraine war has continued to deliver disruptions to key commodity prices including oil.
According to Deloitte, that means that interest rate increases have mostly been ineffective at bringing inflation under control.
“The inflation data released today is further evidence that the Reserve Bank has increased interest rates too far,’’ Deloitte Access Economics partner, Stephen Smith said.
“As Deloitte Access Economics has been warning for the past 12 months – and as the Reserve Bank’s own research shows – excessive inflation in Australia has mostly been caused by supply side factors, meaning that interest rate increases have mostly been ineffective at bringing inflation under control.
“Rather, inflation has fallen as a result of repairs to global supply chains and an easing of import prices.
“The Australian economy is softening dramatically, the pace of inflation has peaked and is moderating quickly, wage growth is not excessive and medium-term inflation expectations are not rising. In that context there should be no further interest rate increases in Australia.”
And the big problem in the Australian economy – rising rents and housing prices – is not being fixed by higher interest rates.
“In those areas of the Australian economy that are still seeing strong price growth – namely housing and energy markets – supply side challenges are similarly to blame,’’ he said.
“Higher interest rates will not encourage a faster energy transition, nor unleash a wave of home building. Instead they will make these issues worse.
“A narrow, dogmatic view of the link between unemployment and inflation fails to recognise the key sources of excessive inflation in Australia at present, and therefore misdiagnoses the correct policy response.
Mr Smith also told news.com.au that the RBA should not have raised rates as high as the current levels.
“They should have increased interest rates a little bit but not by as much as they did,’’ he said.
“Supply side inflation needs to be tackled by focusing on fiscal policy, investment and innovation to lift productivity; competition policy to improve efficiency and erode market power; and tax policy to boost prosperity.
“And that’s because most of the inflation was not because of demand side stuff.
“Rather, the RBA should be waiting and using other policies such as stimulus to build more houses.”
According to the Australian Bureau of Statistics consumer price growth slowed by more than expected, to 0.8 per cent over the three months.
Rent inflation is driving inflation, 2.5 per cent in the June quarter and the highest since 1988.