At its meeting on 6 June 2023 the Reserve Bank of Australia Board decided to increase the cash rate target by 25 basis points to 4.10 per cent.
Banks and other financial institutions are adjusting their mortgage & loan investment rates upwards again and the ABS Cost Price Index (CPI) remains stubbornly high for the category labelled Food & non-alcoholic beverages.
This was the twelfth cash rate rise in the thirteen months from 4 May 2022 to 7 June 2023.
The inflation rate is hovering at 7.0, while everyone hopes that by the end of June it will stand at 6.25.
The fact that it appears inflationary pressures might still be with us in 2024 doesn’t make for happy little Vegemites in the average Australian household.
This general dark mood can be measured using the Misery Index. An economic concept created in the1960s by Okun and further refined by Barro and Hanke.
It is based on the assumption that:
1) a higher cash rate/interest rate increases the cost of borrowing;
2) which in turn drives up the cost price index for essential goods services;
3) when these factors combine with the seasonally adjusted unemployment rate (rate calculated at times two if you are a Hanke purist); and
4) there is slower/lower growth in the nation’s gross domestic product;
5) this combination goes on to create economic and social costs – or misery – for a country.
To establish where a country is on the Misery Index basically one adds the current reserve bank cash rate, cost price index & seasonally adjusted unemployment figures together and then divides that number by the year end real gross domestic product per capita to produce the Index score.
In Australia’s case the Misery Index according to Professor Guay Lim and Associate Professor Sam Tsiaplias (University of Melbourne) – writing in March 2023 – came in at a whopping 16.3 per cent in third quarter of 2008 during the Global Financial Crisis and 13.7 per cent in the second quarter of 2022, just as the global pandemic really began to bite.
The Misery Index fell sharply in in the second quarter of 2021 but began to climb again over the following months reaching 9.9 per cent in December.
The quarterly Economic Misery Index since 2000. Recent high inflation and high interest rates have caused a rapid rise in the index. Source: Australian Bureau of Statistics, and the Reserve Bank of Australia. Graph: University of Melbourne, Pursuit, “WHAT WE CAN EXPECT FROM THE 2023 ECONOMIC ‘MISERY INDEX’ ”, March 2023
By 2022 the annual economic misery index was at 9.2 per cent.
Unfortunately the Misery Index is not currently budging by much. In the first two weeks of this month, June 2023, it would seem that our quota of misery is somewhere between 9.0 and 9.11 per cent.
Columnist Van Badham writing in The Guardian on 9 June 2023 had this to say:
Australian households with the average $600,000 mortgage have been asked to find a spare $17,000 among the couch cushions since the RBA began its lifting-rates-a-thon last May.
There’s rising costs of other expenses, such as transport. The Australian Automobile Association calculated the average cost of running a car in this country went up $28.31 a week in the March quarter; in Brisbane and Melbourne, it went up $34. With associated automotive costs, using a car in Sydney now averages $510 a week.
Meanwhile, in regional Victoria, one food bank is shipping 40 tonnes of food every day to help struggling families.
Why are the price rises happening? International research conducted by the OECD concluded “corporate profits contributed far more to Australia’s rise in inflation through the past year than from wages and other employee costs”. There’s been similar analysis from the European Central Bank. The Reserve Bank of Australia and Treasury disagree, I guess because the OECD is led by notorious communist Mathias Cormann.
The RBA insists that the pay packets of Australian workers have magically, secretly swelled, and this is driving inflation – even though, as Australian economist Stephen Koukoulas has said, “real unit labour costs only rose 0.1% in the March quarter and 1% over the course of the year”.
And how is it possible wages are inflicting such terrible damage when the ACTU could observe major local employers are enjoying profits at Scrooge McDuck levels? The latest half-yearly statements had Ampol bathing in $440m, Coles $616m, Qantas $1.4bn … and the Commonwealth Bank taking a swim in the gold coins pool at a depth of $5.15bn.
Philip Lowe is the RBA governor. Although he has a whole bank board and a coterie of senior mandarins alongside him making rate rise decisions, he is certainly to blame for public statements that imply “workers pay to solve inflation they didn’t cause”, to quote (yet another) economist Jim Stanford.
The theory for the rises is neoliberal orthodoxy; apply economic pressure to cause unemployment, and make those who retain their jobs live in such valid terror of the burning tyre-pit hell that is Centrelink that they won’t make pay demands and therefore won’t drive “wage price” inflation.
Lowe has generously suggested that those households struggling to keep up with rising mortgages – 27.8% of whom are now at risk of mortgage stress – to just “pick up more work”. This is Schrödinger’s employment policy, where the RBA advocates for and against employment at the same time, while you place a box on your head and scream at your ballooning mortgage repayments. An earlier Lowe suggestion was that those struggling with exploding rents should magic up some flatmates or move back to a “home” that may or may not exist.
You, Australian, are responsible for your own misery. But that means you’re responsible for your own happiness, right?
So while you’re forced to cut spending, alleviate supermarket blues by performing a funky dance in the canned veg section the inevitable moment a Katy Perry song comes over the PA. Similarly, suppressing an instinct to ask for the wages you need to meet your costs can be a lot less painful if you hum your favourite 80s sitcom themes at work.
Automotive costs might force you into long and difficult walks to overcrowded, underfunded public transport, so maybe commute in a clown suit. If you’re facing record rent rises, you could consider reciting beautifully sad poems from the nearest window and lure flatmates to you with your tender pain.
History suggests there are alternatives, but demands for rent freezes and price controls are unconstitutional. Referendums to allow government economic intervention of this kind were defeated in 1948 and 1973. Faced with inflationary challenges in the 1950s, though, the Liberal government of Robert Menzies addressed the problem by raising taxes on the rich.
Sadly, the Australian people voted Scott Morrison into power in 2019 on a promise to implement the stage-three tax cuts, and then a promise by Labor to keep these cuts on the books arguably convinced enough swing voters over the electoral line.
There is no help coming for Australians from the RBA. Perhaps we should ask ourselves how much of this misery we might have power over, after all.
