Wrong way to tackle inflation (letter)by Chris HilderNews Weekly
, May 24, 2008
What sort of economic wonderland are the Federal Government and Reserve Bank inhabiting?
Unless I am missing something, the main driver of inflation is higher oil prices, which increase costs in virtually every industry in the economy. A secondary driver is higher food costs flowing from the drought.
Both of these drivers (putting creative alternatives to one side) are outside of Australia's control and not the result of an overheated economy; so why do the Federal Government and Reserve Bank think that a larger budget surplus and higher interest rates, respectively, will do anything to contain inflation?
The biggest danger from external cost-driven inflation is the risk of its precipitating a wage-price spiral that would lead Australia into stagflation.
It seems to me that the one way to reduce this risk would be to compensate wage-earners by maintaining their purchasing power. The Federal Government can do this by reducing taxes (both individually and on company costs), and the Reserve Bank can support it by lowering official interest rates.
Such an approach may also dampen pressure for wage increases in those sectors actually suffering skills shortages. So why are both bodies taking the opposite approach?
And just to top off the headlong rush to stagflation, why create a triple and quadruple whammy of inflation shocks by increasing energy costs via decarbonisation ideology and power industry sales to the private sector?(Mr) Chris Hilder,