DAVID KOCH: Fact-checking Treasurer Jim Chalmers’ claims about cost-of-living crisis

Federal Treasurer Jim Chalmers is on a mission. To break the recent global trend of incumbent governments losing elections because of their economic credentials.

Kamala Harris is just the latest incumbent to be rolled by an electorate wanting a scapegoat for the significant deterioration of their lifestyle, having been ravaged by high inflation and high interest rates.

With a Federal election scheduled for the first half of next year, Chalmers is on the offensive to highlight Labor’s economic management skills and to showcase why they should be given another term in office. The reality is there may not be a cut in interest rates before the May election deadline and the Government would go to the polls with Australian households under the same financial strain as they are now.

Wednesday’s economic update from the Treasurer was a way of getting ahead of the voters’ concerns, softening us up that circumstances beyond his control are impacting the Government’s budget, as commodity prices fall and corporate tax revenue comes in lower as profits slow because of a weak economy.

Cost of living and the economy are still the biggest concerns of voters, and you can be sure the Government will be promising more rebates in return for your vote. Since Labor’s election win in 2022, the Government has delivered generous cost-of-living relief, including childcare subsidies, rent assistance, electricity rebates and tax cuts.

It has already flagged student debt relief, and there is an expectation another round of electricity and rental rebates will be announced.

All of these measures have not only saved Australians cash, but also reduced the headline inflation rate. The energy bill rebate of about $300 a year (more if you’re a Queenslander because of their recent State election) reduced the headline inflation rate by 0.5 per cent.

The problem is the Reserve Bank ignores the headline CPI rate when determining interest rate policy and instead focuses on the “trimmed mean” which ignores any short term Government rebates as artificial influences.

That’s the reason for the feud between the Treasurer and Reserve Bank governor Michele Bullock. Chalmers wants an interest rate cut to ease the cost of borrowing (and win votes) because the headline inflation rate is down within the RBA target range.

Bullock is basically saying governments just can’t rig the inflation rate with short term handouts which skew reality.

So, lets run a quick check on the Federal Government’s role in the cost-of-living crisis. How much is it contributing to inflation and keeping rates high?

There is no doubt prices on goods have come down significantly as the post pandemic supply chain issues have been sorted. International trade is back to some sort of normality, our favourite imports are back in good supply and there have been few natural disasters to spike fruit and veg prices. That’s all great news.

But the price rises of the services element of the inflation figure are not slowing as quickly as expected. This is what the RBA is referring to when they talk about inflation being “stickier” than expected.

The biggest cost for companies in the services sector is wages. So, when the Treasurer brags about giving everyone a pay rise, the ripple effect is it’s adding to the cost base of services for companies, which then pass it through to customers as higher prices. That is the reason inflation is sticky and the reason interest rates aren’t being cut.

The Treasurer constantly says governments don’t set prices. They don’t. But they have a huge influence on prices with decisions such as wages.

This week CreditorWatch reported business insolvencies were reaching the same levels as during the pandemic because businesses were being hit with increased wage and energy costs and were unable to pass them on to consumers who are bargain hunting to cope with cost of living.

The biggest drivers of inflation have been rents (because of the housing shortage), insurance premiums (don’t get me started — there is no justification for it) and building costs. With supply chains back to normal, the major driver of building costs is wages.

Why? Governments.

Ask any builder and they’ll tell you they have to pay more to attract staff because Federal and State governments are raiding their workforce for their massive infrastructure and energy transition projects. They are creating a shortage of workers.

For builders to attract staff away from the government projects they have to offer more money which then gets passed on consumers through higher building costs which, in turn, adds to the “sticky” inflation and stops the RBA cutting interest rates.

If a builder or services company can’t pass on these government-induced cost rises, they go broke and become the reason the Treasurer was yesterday talking about a drop in business tax revenue.

As I say, the Treasurer is right. Governments don’t set prices. But they do influence prices by the economic environment they create.