“Sticky inflation” is not Australian workers fault and higher interest rates and lower wages won’t solve it

by Greg Jericho


Australia’s inflation is rising and falling in line with the experience in Canada and the USA despite the RBA not raising rates by as much as did the central banks in those two countries.

Over the past few months there has been a growing amount of commentary about Australia’s inflation due to it not falling at the same pace it had throughout 2023. This “sticky” inflation, in which inflation has remained around 3.5%-3.8% has seen numerous commentators, economists and business groups calling for either higher interest rates or lower wage growth (or both) to get inflation to fall below 3%.

Many of these inflation hawks have looked to Canada, where official rates rose to 5%, or the USA, where the Federal Reserve increased rates to 5.38% compared to the current cash rate of 4.35%.

Such calls have become even louder off the back of the European Central Bank and the Canadian central bank lowering their interest rates for the first time. Similarly this week also came the news that inflation in the United States had fallen in May from 3.4% to 3.3%.

But the suggestion that Australia’s inflation is higher than either Canada or the USA because the Reserve Bank has not increased rates high enough is rather spurious.

Firstly Australia’s inflation began to rise and then peaked around 6 months after that of the USA or Canada. When we line up the paths of inflation by months before and after the peak, it is quickly obvious that Australia’s inflation has and is following almost exactly the same path as those two North American nations.

Indeed in the 7 months after the peak in December 2022, Australia’s inflation dropped faster than did either USA’s or Canada’s inflation after their respective peaks. Was that a sign of the RBA’s failure to raise rates as high they did in the USA or Canada?

Also while Canada has cut rates, they remain at 4.75%, some 40 basis points above the current cash rate here in Australia. It would seem quite logical that Canada, which increased rates earlier and higher than here, would be expected to cut rates sooner than would the RBA.

The experience in Canada also highlights the fallacy of assuming the issue with inflation is high wages. The annual wage growth of permanent employees in Canada rose from 4.8% in April to 5.2% in May. This is well above the 4.1% wage price index growth here in Australia. And yet inflation in Canada is 2.7% compared to Australia’s 3.6% in the 12 months to April.

The inflation over the past two years has not been driven by wages, and calls for the RBA to raise rates even further to reduce spending and increase unemployment is merely another tactic by business groups and conservative economists to keep wages down and reduce the living standards of households.

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