How to fight inflation and give cost of living relief
Real wages are going backwards at the fastest rate since records began. They have already fallen three percent and the budget papers predict that this will continue to fall another 2.25 percent into 2023 and 2024. This means that on average the price of the things people buy is going up faster than their wages. And that doesn’t include increasing mortgage repayments because of rising interest rates.
The Government needs to be careful when it comes to helping people with the rising cost of living. Poorly directed cash payments could add to inflation and make the Reserve Bank more likely to increase interest rates.
However, federal and state governments have considerable control over the prices of many goods and services such as medicine, childcare, aged care, education, electricity, public housing, and a wide range of other services. Reducing the cost of these can help reduce the cost of living for many Australians without fuelling inflation.
On this front, the Budget includes measures to reduce the price of childcare, medicines, and TAFE. All of these will not only ease cost of living pressures on households, but they will also lower prices and put downward pressure on inflation.
Long-time Australia Institute watchers will know we have advocated for cost-of-living relief that also fights inflation.
It is good to see that the government has done just that.
We have seen this happen before. When the government briefly made childcare free during the pandemic, it caused the CPI to fall by almost full percentage point.
We also saw this work in reverse. At the beginning of this year, when inflation first started to increase rapidly, one of the factors driving this increase was the previous government’s increase of university fees.
The government has control of some prices, and it has made the correct decision to target its cost-of-living relief at these prices.