EDITORIAL: Jobs boost is bad news for Australia’s inflation challenge

The Nightly
RBA Governor Michele Bullock.
RBA Governor Michele Bullock. Credit: The Nightly

It’s an awkward fact of life that for the economy to function well, a certain proportion of people who want work need to be out of it.

If everyone who wanted a job had one, employers would have to pay people more, which would then push up the price of everything.

Understandably, it’s not something that economists or politicians like to acknowledge. So they’ve come up with a whole range of euphemisms to allow them to articulate that need, without actually having to say the words.

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Just know that when our Reserve Bank boffins talk about watching for a “loosening” in labour market conditions, what they’re keeping an eye out for is more people losing their jobs. Collateral damage on the way to slaying Treasurer Jim Chalmers’ inflation dragon.

There’s even a term for that sweet spot — the lowest unemployment can go without fuelling excessive wages growth and inflation. It’s the “non-accelerating inflation rate of unemployment”, or NAIRU, if you like your euphemisms as an acronym.

Like a lot about the economy, the NAIRU is unknowable and unquantifiable.

In a speech last year, RBA governor Michele Bullock said it was believed to be somewhere around 4.5 per cent.

So news that the jobless rate has just ticked lower in May to 4 per cent, down 0.1 percentage points from April is bad news for those whose job it is to get inflation back under control, as well as for everyone outside of the 41,700 Australians who have a job today but didn’t a month ago.

Stubbornly low unemployment figures are part of the reason the RBA has had such difficulty in returning inflation to its target range of between 2 and 3 per cent. For a time, some hoped we would see what had previously been thought to be impossible — inflation receding without the need to drive up unemployment.

There’s a name for that too: immaculate disinflation.

Unfortunately, it’s looking like in order to get a handle on our inflation challenge, someone is going to have to get screwed after all.

It means that hopes of a rate cut any time soon — which were already thin — are looking even more remote. Economists at ANZ this week pushed out its forecasts for the first rate cut to February and expect just 0.75 percentage points of cuts next year.

There’s even the real possibility of another hike. Just one more set of unfavourable inflation figures could be enough to make the RBA pull the trigger.

All the while our leaders are bickering about whether or not a “per capita recession”, in which economic activity on a per person basis slips backwards, is as alarming as an “official recession”.

The challenge for them now, with an election not far off and the prospect of this inflation challenge stretching out long into the future, is to come clean. To drop the spin and the euphemisms and communicate openly and honestly to Australians their plan to pull us out of this slump.


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