US president-elect Donald J Trump announces the following based on "Project 2025: presidential transition project" hard right political playbook

On 8 November 2024 US president-elect and convicted fraudster, 78 year-old Donald John Trump made the following announcement ushering in an authoritarian state, headed by a president intent on revenge against those he perceives as his enemies and retribution for a long list of delusional grievances.

 

Donald Trump has just released his plan to "demolish the deep state."

Unglued Project 2025 stuff.

Buckle up, folks. pic.twitter.com/AniimjUcbG

— Art Candee 🍿🥤 (@ArtCandee) November 8, 2024

 The Heritage Foundation and the Project 2025 Advisory Board - along with Donald Trump himself - have repeatedly denied any association with each other. Unfortunately these denials have proved to be untruths.

Project 2025 922-page 180-Day Playbook at

https://www.project2025.org/playbook/ 

and

https://static.project2025.org/2025_MandateForLeadership_FULL.pdf   

Australia's initial reaction to Trump's election win is a mixture of caution and dread....

Financial Review, 7 November 2024:

President-elect Donald Trump will likely be a unilateralist in his dealings with Australia and the rest of the world, neither a pre-World War Two isolationist nor the post-war global policeman.

Trump’s highly transactional view of life means he will take America in and out of world affairs as and when it suits his mercurial personality. He will approach each international relationship through the prism of what is in it for him. For Trump, the geopolitical is personal.....

The immediate risk for Australia is Trump’s flagship policy of tariffs on imports, which threaten a 60 per cent charge on Chinese goods and up to 20 per cent on all others. Robert Lighthizer, his hawkish former trade representative who is tipped to return to the new administration, doesn’t believe that free trade works. He argues that America did not lose its microchip industry because of a lack of comparative advantage, but because of the subsidies and industry policies of other countries. He also thinks it has been China’s choice not to open more of its domestic market to better balance its trade with the US.

Australia is a small open economy highly exposed to the ripple effects of an all-out US-China trade war. ANU economist Warwick McKibbin says that because China takes a massive 47 per cent of Australia’s goods exports, the collateral damage to Australia from a Sino-US tariff fight could mean a hit on the economy of 0.3 per cent of GDP a year by 2035. In America, the proposed tariffs would rekindle inflation, forcing up interest rates and the cost of funding immense US debts. That will keep upward pressure on global interest rates too, making it harder for the Reserve Bank to cut rates here. On the other hand, China may have kept fiscal stimulus plans in reserve for a Trump trade clash, from which Australia would gain.

Australia will watch closely how Trump treats wider US alliances in the Pacific.

The mutual harm of a trade war might pave the way to negotiating instead. Trump might be content to use the threat of tariffs to push for concessions from trade partners. And if tariffs were to be implemented, the heavy cost to US consumers and the damage to US exporters hit by retaliatory tariffs could see Congress itself water them down to more selective targeting. Australia could blunt some of the impact of any tariff changes by successfully negotiating reductions as it did for steel and aluminium exports during the first Trump administration.

Australia will watch closely how Trump treats wider US alliances in the Pacific, the so-called “lattice work” of partnerships built up by the Biden administration connecting Japan, South Korea, the Philippines, India, and Australia.

Trump has a much more insular vision of American power, viewing long-term commitments to international alliances as liabilities the US could do without. Yet if he leaves a strategic vacuum by quitting the region then China, Russia and others would move fast to fill it. And it would not be long before even a more self-contained Trump America began feeling the pressure of an expanding China. Trump would find that turning his back on allies was a more costly transaction than he thought.

The Sydney Morning Herald, 7 November 2024:

Donald Trump’s policy agenda could precipitate a global financial crisis and fuel inflation, one of the world’s leading analysts has warned, with fears Australians will suffer higher interest rates and a $36 billion hit to the domestic economy.

As the Reserve Bank conceded the incoming US president’s debt-fuelled policies would put upward pressure on global interest rates, former bank board member Warwick McKibbin likened the impact of Trump’s plans on Australia to being in the middle of a line of fireworks as they exploded on New Year’s Eve.

Trump’s plans also pose enormous political problems for Prime Minister Anthony Albanese and Liberal leader Peter Dutton in the lead-up to next year’s election, with analysis suggesting even winning some concessions from the Trump administration would not prevent ongoing turmoil for Australia.

Interest rates globally have climbed since Trump’s victory over US Vice President Kamala Harris, fuelled by expectations his plans for tax cuts, tariffs and the deportation of millions of undocumented workers will increase the size of American government debt.

The Committee for a Responsible Federal Budget, an independent US organisation, estimates the Trump agenda would increase debt by $US7.8 trillion ($12 trillion) by 2035, taking it to an unprecedented 143 per cent of GDP.

Following Wednesday’s election results, the Australian dollar – among many currencies – lost value against the US dollar as investors bet a further lift in American government debt would require higher interest rates.

More speculative investments such as cryptocurrencies also enjoyed a surge in support. The price of bitcoin lifted from $104,500 early on Wednesday to a record high of $116,000 in the 21 hours after Trump’s re-election became clear.

Giving evidence to a Senate hearing in Canberra, Reserve Bank assistant governor Christopher Kent said Trump’s policies such as tax cuts would probably mean higher US long-term interest rates and inflation, which would flow through to the global economy.

“Because the US is such an important source of funding, and the demand by the government for borrowing is substantial, that’ll have upward effects on global interest rates,” he said.

Kent said Trump’s protectionist tariff policies would slow growth around the world.....

McKibbin said Trump’s tariff plan, which includes imposts of 10 to 20 per cent on Australian goods and 60 per cent on those from China, would directly hit the local economy while undermining global trade.

But the broader elements of Trump’s agenda, especially possible interference in the setting of American interest rates, could deliver the world another financial crisis.

“It’s like standing on Sydney Harbour Bridge when they set off the fireworks – you don’t want to be on it. There are fuses everywhere and they are just going to ignite,” McKibbin said.

Nationwide News, 7 October 2024:

The Reserve Bank claims there could be an “adverse effect” on Australia if incoming US President Donald Trump were to impose tariffs of up to 60 per cent on China.

During senate estimates on Wednesday, RBA assistant governor Christopher Kent said it was a “big concern“ whether Mr Trump follows through on the levies of Chinese-made goods, but added the full-effect was still unclear.

The levies would be higher than the 7.5 to 25 per cent implemented during his first time.

They are considered part of a broader suite of measures to boost the US economy, which also includes broad tariff increases on all imports of up to 10 per cent, cutting taxes, slashing immigration, and deregulation.

“The big concern is large tariffs on China, which may have an adverse effect on us,” he said.

“So is it right to characterise the RBA position as of this morning as unclear in terms of what the United States election outcome means for inflation outlooks.”

Speaking more broadly, he said Mr Trump’s promised tariffs would likely ”push up” the US dollar and create less demand by the US for goods produced in other markets.

“But it means less demand by the US for global goods, so that’s sort of a negative for growth elsewhere,” he said.....

UPDATE

Trump with the bit between his teeth on 15 December 2022.....

DEVELOPING: 🚨 President-Elect Donald Trump Outlines Plan to “Shatter” Censorship Regime, Restore Free Speech 🚨

President-Elect Donald Trump has released a comprehensive strategy to dismantle what he calls the "left-wing censorship regime," promising swift action on his first… pic.twitter.com/fjwJViKabz

— MiddleMaga.com (@StucknDaMid) November 8, 2024

Chair of ACTU Inquiry into Price Gouging and Unfair Practices does some plain talking about the relationship between 'intractable inflation' & the misuse of corporate power

Finally. A dark uncomfortable nexus that federal and state governments have tried to ignore, is exposed to the light of day.

INQUIRY INTO PRICE GOUGING AND UNFAIR

PRICING PRACTICES, Final report, February 2024

FOREWORD

I have welcomed the opportunity to chair this inquiry

for three reasons.

Firstly, there has been much discussion about

inflation and its causes including monetary and

fiscal policy, international factors, wages, supply

chain disruption and war. However, there is hardly

any discussion that looks at the actual prices

charged to consumers, the processes by which

they are set, the profit margins and their possible

contribution to inflation.

Secondly, there is also much discussion about

market power and its harms. But there is very little

discussion of any policies or actions that might be

taken to deal with the main harm: high prices.

Unreasonably high prices are not prohibited by

competition law. The ACCC, worthy though it is,

is restricted to looking at unlawful anti-competitive

agreements - for example, when competitors agree

on prices. If two firms, for example, coordinate

their prices without any illegal communication,

that behaviour is outside the scope of the Act. If

governments take actions which have the effect of

raising prices, that is also outside the scope of the

Australian Competition and Consumer Act.

In short, firms are free to charge as much as they

like. They can price gouge lawfully as long as there

is no unlawful collusion. This has given rise to a

policy gap – there is no set of government policies

about excessive prices. This report provides an

opportunity to examine whether this should be the

case at a time when Australians are so concerned

about the cost of living and the impact of prices on

their lives.

Thirdly, I am pleased to be engaged with the ACTU

in a prices inquiry because the concern of the Trade

Union movement is the impact of prices on the

costs of living of ordinary Australians. It has been

valuable to hear from ordinary people in this inquiry

rather than the ‘usual suspects’ that is businesses

and business organisations making economic

submissions about their prices.

Traditionally, the term price gouging has referred

to situations where sellers exploit a shortage of

essential goods and services to raise prices to

excessive levels. However, in the public mind

there is a wider meaning of the term: prices that

significantly exceed levels that would occur if there

was competition. Such prices substantially exceed

costs of supply and a reasonable level of profit.

What we have seen over recent years is a dramatic

increase in costs paid by consumers.

Some of the highest price increases occur in sectors which are characterised by having disproportionate market power, a level of power over their consumers, or a level of monopsony power over their supply chain and workforce.

At the same time as consumers experience significant increases in costs. Across food and grocery, energy, and financial services corporate profits are up.

Normally, inflation is a distributed experience, and the experience of those without market power being both squeezed on the supply and demand side is evidence of that. Some of Australia’s largest businesses, often supplying inelastic goods, are maintaining or even increasing margins in response to the global inflationary  episode.

This is a situation that warrants further investigation.

In particular, it warrants investigation of the state of competition in Australia and of the associated regulatory settings and to learn from the experience of ordinary people as to the impact of these matters.

In short, if there is a high price, it usually pays to investigate its causes – typically a lack of competition or a market shortcoming – and possible remedies.

During this inquiry for example it was observed that electric vehicle prices in New Zealand are considerably lower than in Australia. In probing the reasons, it was found that the difference is due to a little known unwarranted import restriction i Australia that does not apply in New Zealand. This explains why prices on electric vehicles are much higher than they should be.

The inquiry is very timely.

The world is facing an inflationary episode. The goal of central banks and governments across the world is to drive down the rate of inflation to a more sustainable level. While there has been an enormous amount of public discourse on the contribution of wages and employment to inflation, too little discussion has been on the role price setters have on broader inflation outcomes.

The Governor of the Reserve Bank of Australia, Michelle Bullock, has noted that the inflation Australia is experiencing now is ‘homegrown.’ This declaration makes the examination of price-setting behaviour by domestic firms more important, as we cannot simply say that prices have increased elsewhere and are simply being passed on. The exercise of market power and limits on competition in specific markets have exacerbated what began as a global problem.

This inquiry has conducted 5 public hearings, received over 750 public submissions and more than 20 detailed contributions from academics, experts, think tanks, unions, businesses, and thei representatives.

These diverse perspectives are vital for a comprehensive understanding of the issues. Th public hearings in Melbourne, Sydney, Adelaide, Cairns, and Canberra have allowed us to directly engage with the community and hear a wide range of experiences and insights. These voluntary contributions have deeply enriched the inquiry.

As I stated when I agreed to conduct this inquiry, this is a serious examination of prices and competition in Australia.

This report summarises the key policy issues and draws on the submissions to develop a set of recommendations  on price and competition policy which, if adopted, would substantially improve competition and decrease the price pressure faced by ordinary families.

Prof. Allan Fels AO

Chair

The full 80 page report can be read online and downloaded at:

https://pricegouginginquiry.actu.org.au/wp-content/uploads/2024/02InquiryIntoPriceGouging_Report_web.pdf

Excerpt from Pages 5-6 of the report:

BUSINESS PRICING PRACTICES

The report analyses a selection of exploitative business pricing practices that enable the extraction of extra dollars from consumers in a way that would not be possible in markets that are competitive, properly informed and that enable overcharged consumers to readily switch from one supplier to another.

The fact that there is a quite widespread lack of competition in Australian markets means that pricing practices that might be accepted in very competitive markets are unduly exploitative of consumers in that setting.

Loyalty taxes set initial prices low and then sharply increase them in subsequent years when consumers cannot easily detect, question, or renegotiate them and where the ‘transaction costs’ of changing to other competitors are high. Examples come from banking, insurance, energy, and other areas. Loyalty schemes are often low cost means of retaining and exploiting consumers by providing them with low value rewards of dubious benefit. These schemes are also often badly run.

Drip pricing where firms only advertise part of a product’s price and reveal other prices later as the customer goes through the buying process is spreading including in airlines, accommodation, entertainment, pre-paid phone charges, credit cards and others.

Excuse-flation where general inflation provides camouflage for businesses to raise prices without justification is also more prevalent in the current environment. As inflation starts to fall excessive inflationary expectations and future cost increases can be built into prices.

Confusion pricing involves confusing consumers with a myriad of complex price structures and plan making price comparisons difficult and dulling price competition. It occurs more and more in areas such as telecommunications, financial or maintenance services and other fields.

Asymmetric or ‘rockets and feathers’ pricing is of much concern in the current environment especially as inflation is starting to come down. When costs rise prices go up quickly ‘like a rocket’ but when costs fall prices fall slowly ‘like a feather falling to the ground’. This practice of delaying price falls when costs have fallen can be very profitable for businesses. A recent example concerned meat prices when prices paid to farmers for lamb fell but retail prices did not, at least until there was publicity including from this inquiry about the delay.

Algorithmic pricing is the practice of using algorithms to set prices automatically (but taking account of competitor responses) raises issues about whether this reduces price competition and is analogous to cartel pricing.

Price discrimination which in its simplest form involves charging different consumers different prices for the same product enables businesses to set prices according to how much each consumer is willing and able to pay. It takes many forms. It is enabled by a lack of competition. If there were competition charging high prices to customers who wish to or have to pay higher prices would not be possible because competitors would bring those prices down to normal levels. This report identifies a number of examples ranging from banks (better rates from customers likely to leave them), electricity (better prices for business customers than for consumers even allowing for lower costs of supply) and medical specialists which offer vastly different prices for near identical services. Of particular concern is the rise of much greater use of price discrimination enabled by the rise of digital platforms, new technology, detailed customer data and sophisticated profit maximising pricing methodologies.

These practices all result from an economy which is insufficiently competitive and gives room for businesses to engage in exploitative pricing practices.

There is a case for a much more active public policy for investigating and analysing practices that operate at unwarranted cost to customers.

Tweet of the Week

 

All we wanted for Christmas was a new Reserve Bank Governor. Be careful what you wish for! pic.twitter.com/l9rKtElfiy

— john shakespeare (@johnshakespeare) November 8, 2023

 

Australia's Misery Index might not be as high as during the Global Financial Crisis or the first year of the COVID-19 pandemic but it's at a less than comfortable level in 2023

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.

Cartoon of the Week

David Rowe

Reserve Bank of Australia raises the interest rate yet again - promising more of the same in coming months. Recession worries begin to emerge

 

On the 7 February 2023 the Reserve Bank of Australia (RBA) increased the official cash rate by 0.25%. The current official cash rate as determined the RBA is now 3.35%.

As we reach the ninth official cash rate rise since 4 May 2022, the Reserve Bank Governor’s words set out below are less and less reassuring.

According to the Australian Stock Exchange (ASX) RBA Rate Tracker:

As at 8 February, the ASX 30 Day Interbank Cash Rate Futures March 2023 contract was trading at 96.525, indicating a 65% expectation of an interest rate increase to 3.60% at the next RBA Board meeting.

The next RBA Board meeting and Official Cash Rate announcement will be on the 7th March 2023.

Reserve Bank of Australia

Media Release

Statement by Philip Lowe, Governor: Monetary Policy Decision

Number 2023-04

Date 7 February 2023

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 3.35 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 3.25 per cent.

Global inflation remains very high. It is, however, moderating in response to lower energy prices, the resolution of supply-chain problems and the tightening of monetary policy. It will be some time, though, before inflation is back to target rates. The outlook for the global economy remains subdued, with below average growth expected this year and next.

In Australia, CPI inflation over the year to the December quarter was 7.8 per cent, the highest since 1990. In underlying terms, inflation was 6.9 per cent, which was higher than expected. Global factors explain much of this high inflation, but strong domestic demand is adding to the inflationary pressures in a number of areas of the economy.

Inflation is expected to decline this year due to both global factors and slower growth in domestic demand. The central forecast is for CPI inflation to decline to 4¾ per cent this year and to around 3 per cent by mid-2025. Medium-term inflation expectations remain well anchored, and it is important that this remains the case.

The Australian economy grew strongly over 2022. The central forecast is little changed from three months ago, with GDP growth expected to slow to around 1½ per cent over 2023 and 2024. The recovery in spending on services following the lifting of COVID restrictions has largely run its course and the tighter financial conditions will constrain spending more broadly.

The labour market remains very tight. The unemployment rate has been steady at around 3½ per cent over recent months, the lowest rate since 1974. Job vacancies and job ads are both at very high levels, but have declined a little recently. Many firms continue to experience difficulty hiring workers, although some report a recent easing in labour shortages. As economic growth slows, unemployment is expected to increase. The central forecast is for the unemployment rate to increase to 3¾ per cent by the end of this year and 4½ per cent by mid-2025.

Wages growth is continuing to pick up from the low rates of recent years and a further pick-up is expected due to the tight labour market and higher inflation. Given the importance of avoiding a prices-wages spiral, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead.

The Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments. There is uncertainty around the timing and extent of the expected slowdown in household spending. Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living. Household balance sheets are also being affected by the decline in housing prices. Another source of uncertainty is how the global economy responds to the large and rapid increase in interest rates around the world. These uncertainties mean that there are a range of potential scenarios for the Australian economy.

The Board’s priority is to return inflation to target. High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later. The Board is seeking to return inflation to the 2–3 per cent range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one.

The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary. In assessing how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.

[my yellow highlighting]

The Sydney Morning Herald, 9 February 2023: 

There is a better than 50-50 chance Australia could fall into recession due to the Reserve Bank’s aggressive increases in interest rates, economists believe, as a growing group of Labor MPs suggest the seven-year term of RBA governor Philip Lowe should not be extended. 

Macroeconomics Advisory chief economist Stephen Anthony said the chance of a recession next year could be as high as 70 per cent due to the impact of the RBA’s high interest rates, coupled with a slowdown in key markets such as China.

Pressure on Lowe has intensified after the RBA pushed interest rates to a 10-year high this week and signalling more than one further increase in coming months. Lowe, whose seven-year term ends on September 17, had signalled in late 2021 that rates would remain on hold until 2024. 

The previous two governors, Glenn Stevens and Ian Macfarlane, both had their terms extended by three years. But with a sweeping review of the central bank due to be finalised and handed to Treasurer Jim Chalmers in late March, there is a growing expectation that Lowe will not stay on beyond September. 

Within the government, there are now open questions about Lowe’s long-term tenure at the bank.....

Tweets of the Week

The gas industry lobby group APPEA have put some ads on social media boasting about how much tax and royalties the gas industry pay.

Here's what they don't tell you.

Climate & Energy Principal Advisor @MarkOgge explains. #auspol pic.twitter.com/6WFafdobkZ

— Australia Institute (@TheAusInstitute) July 25, 2022

With inflation now running at 6.1% annually & wage growth at only 2.4% we have moved from the era of wage stagnation to the new era of cuts to real wages.

— Josh Bornstein (@JoshBBornstein) July 27, 2022

"In the earnings reports, companies have bragged about how they have managed to be ahead of the inflation curve, how they have managed to jack up prices more than their costs and as a result have delivered these record profits"

“Australia isn’t experiencing a wage-price spiral, it’s at the beginning of a price-profit spiral,” said Australia Institute chief economist, Dr Richard Denniss.

“The national accounts show it is rising profits, not rising costs, that are driving Australia’s inflation. While workers are being asked to make sacrifices in the name of controlling inflation, the data makes clear that it is the corporate sector that needs to tighten its belt.”

The report points out that wage growth was at record low levels, while the profit share was at a near-record share of GDP.” 

[The Guardian, 18 July 2022]

Corporations are causing inflation by passing on price increases. They are doing this to protect and grow their profits, the same reason why they are refusing decent wage rises https://t.co/1imWMHBBEA

— Sally McManus (@sallymcmanus) July 17, 2022

The Australia Institute, Are wages or profits driving Australia’s inflation? An analysis of the National Accounts, July 2022, excerpts:

Introduction

In recent months the role of wages in driving inflation has been frequently discussed, with many commentators expressing concern that Australia risks a ‘wage price spiral’.

For example:

“Aggressive wages growth will only spur further inflation growth.”

— Andrew Mackellar, CEO of the Australian Chamber of Commerce and Industry

“We are now at risk of a wages and inflation and interest rates death spiral.”

— Innes Willox, CEO of Australian Industry Group

“In the current circumstances, there is a clear risk that a high increase in wages without improved workplace productivity would fuel inflation and increase the likelihood of a steeper rise in interest rates to the detriment of growth and job creation.”

— Innes Willox, CEO of Australian Industry Group

The fear that wage growth has, or could, play a significant role in Australia’s inflation typically ignores the fact that, as shown in Figure 1, real wage growth is at historically low levels and has been for some time.

While wage growth clearly has not been the driving force of recent increases in Australian inflation, or indeed inflation around the world, the continuing impact of COVID 19 and the sharp increase in global energy prices associated with Russia’s invasion of the Ukraine clearly have.

What causes inflation?

Inflation refers to an overall increase in the level of prices in an economy. According to the International Monetary Fund:

Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.

While much is made of the link between increases in the costs of inputs (such as the price of oil) and increases in prices (such as the price of petrol) in fact many firms have a high degree of discretion about how much, if any, of an increase in costs they will pass on in the form of higher prices.

In short, if firms choose to absorb all of an increase in cost rather than increase prices the cost increases will lead to a reduction in profit not an increase in prices. Similarly, if firms pass on price increases that are more than enough to cover an increase in their production costs then profits will rise. In turn, macroeconomic data on economy-wide changes in prices and the share of GDP flowing to workers and profits can shed light on both the underlying sources of inflation and the distributional consequences of firms’ responses to rising production costs.

While spokespeople for large companies often suggest they have ‘no choice’ but to increase their prices when their costs increase not only do they have the choice to accept lower profits, a closer examination of their language makes clear that they face a range of choices.

For example, in attempting to explain how he had ‘no choice’ but to increase prices in his stores in early 2002, Gerry Harvey, the Executive Chairman of the retail chain Harvey Norman, actually made clear the range of choices he did face:

If a guy down the road drops the price, we drop the price,

If we drop the price, they drop the price.

But if it’s costing you all 10 per cent more than it was yesterday, they’re all going to put up their prices (because) they’ve got no choice.

Mr Harvey makes clear that his company is willing and able to choose to lower prices to match his competitors pricing, even in the absence of a change in cost. He also makes clear that he expects other firms not to absorb any increase in costs and that his firm and his competitors are all likely to increase their prices if costs increase by 10 percent, but it is not clear by how much his firm, or others, would chooses to increase their prices by.

Intriguingly, he ends this explanation by saying firms have no choice, even though all firms have different costs structures and his opening statement is that he would lower his price to match a cheaper offer by a competitor.

As all firms have slightly different cost structures, contract terms for inputs, bottoming costs and exposures to market rents it is inconceivable that all firms in any industry would experience identical changes in price and, in turn, the choices firms make about their price setting in response to changes in cost reflect both their current rates of profit and their willingness to gain or lose market share…..

In short, while in the long run firms must set prices sufficient to cover their costs of production, there is no direct link between costs of production and prices beyond the desire of firms to maintain, or increase, their profits. While firms in new industries seeking rapid growth often deliberately set their prices below their costs in, companies like Santos are currently enjoying a significant increase in price that is entirely unrelated to their cost of production.

Given that profits currently account for a record share of GDP there is simply no truth behind the assertion that the Australian corporate sector has ‘no choice’ but to pass on cost increases in full in the form of higher prices. Indeed, the rising profit share of GDP suggests that Australian firms have, for some time, been choosing to increase their prices faster than their costs have been rising. By definition this causes higher inflation…..

The European Central Bank’s analysis of the role of profits in driving inflation

In a recent speech, Isabel Schnabel, a member of the board of the European Central Bank, said “profits have recently been a key contributor to total domestic inflation” ……

Ms Schnabel went on to state that:

many firms have been able to expand their unit profits in an environment of global excess demand despite rising energy prices… The resilience of profits is particularly evident in those sectors most heavily exposed to global conditions, such as the industry and agricultural sector.

And:

To put it more provocatively, many euro area firms, though by no means all, have gained from the recent surge in inflation. The fortunes of businesses and households have diverged outside of the euro area, too, with corporate profits in many advanced economies surging over the past few quarters.

Poorer households are often hit particularly hard – not only do they suffer from historically high inflation reducing their real incomes, they also do not benefit from higher profits through stock holdings or other types of participation.…..

Australian results

The methodology used by the ECB to decompose recent shifts in price levels and attribute them to shifts in wages, profits and taxes can be applied to Australian data to show the contribution of each to inflation.

The Australia Institute applied the ECB method to annual data for the financial years 2005 to 2021 and quarterly data for June 2021 to March 2022 (the most recent quarter for which data is available). Annual data was used where possible to minimise the volatility in the underlying data caused by COVID-19 support payments affecting tax and subsidies.

The Australian data provides even more stark results than the ECB’s. Figure 5 shows that unit labour costs played almost no role in inflation (as measured by the GDP deflator) over the period 2013 to 2021 and had typically contributed less than half of the GDP deflator prior to 2013.

For the three quarters of data available for 2021–22, encompassing the current uptick in the CPI, labour costs have played an insignificant role, accounting for only 0.6 percentage points of the 4.1 percentage point increase in the GDP deflator (15 percent of the total).

Meanwhile profits have accounted for 2.5 percentage points of the increase in the GDP deflator (about 60 percent of the total).…..

Read the full 15 page report here.

Billionaire business owners and industry lobbyists have other ways of saying our profits are more important than people without ever mentioning the word. Here is a recent example.

ABC News, 17 July 2022:

Head of the Victorian Chamber of Commerce and Industry, Paul Guerra, welcomed the announcement but said the government must ensure it keeps the balance between supporting people in need and running the economy into debt.

"The federal government has told us the pandemic is not over," Mr Guerra said.

"The current wave seems to be stronger than we might have all first thought so we think it's a good thing that support is being provided there for those who are in need.

"That said, we'd like to make sure they come off as soon as the current risk is over so we can accelerate our way as we recover out of COVID."

BACKGROUND

Across the board record profit taking is not just an Australian phenomenon….

Political economist Assistant Professor Isabella M. Weber speaking on U.S. NPR radio program "All Things Considered", 13 February 2022:

Companies always want to maximize profits, right? In the current context, they suddenly cannot deliver as much anymore as they used to. And this creates an opening where they can say, well, we are facing increasing costs. We are facing all these issues. So we can explain to our customers that we are raising our prices. No one knows how much exactly these prices should be increased. And everybody has some sort of an understanding that, oh, yeah, there are issues, so, yes, of course companies are increasing prices in ways in which they could not justify in normal times.

But this does not mean that the actual amount of price increase is justified by the increase in costs. And as a matter of fact, what we have seen is that profits are skyrocketing, which means that companies have increased prices by more than cost. In the earnings reports, companies have bragged about how they have managed to be ahead of the inflation curve, how they have managed to jack up prices more than their costs and as a result have delivered these record profits. [my yellow highlighting]