Inflation risks are over inflated

Anyone who has listened to the new Labor Federal Treasurer Jim Chalmers talk about rising inflation would be forgiven for thinking he had just discovered fire.

Chalmers, like a deer in the headlights, talks of gloom and doom about rising inflation caused by, as he likes to put it, a lost decade.

Of course, the blame is diverted to the former Coalition Government who were, of course, directly responsible for the global pandemic and starting the war in Ukraine.

Everyone knows that the prices of everything from a carrot to a car have gone up – especially in the last 12 months.

It’s amazing what a global pandemic, a war in Europe and systematic supply chain shortages can do to the price and delivery of goods and services.

Economics 101 provides that inflation is caused by either supply and demand or cost pressures.

Where demand outstrips supply, the price goes up.

If the cost of production rises – the price of goods and services go up.

Labor’s solution to these inflationary pressures – which are occurring worldwide – is to try to force wage increases on employers who are already struggling to recover from the pandemic, managing staff shortages and supply chain disruptions.

Add in increases to electricity and fuel prices and it is a perfect storm.

While wage increases sound like a good idea, at times like these, they actually add fuel to the inflationary fire by further increasing supply and demand pressures and also the costs of production.

The last time the world saw similar inflation spikes was in the 1970s caused by OPEC restricting the global supply of oil that led to global fuel price shocks.

Governments around the world took measures to insulate themselves from being totally dependent on international fuel sources.

The lessons learned in the 1970s have now been forgotten and Australia like the rest of the world is playing the price again.

There are many measures Governments can do to try and counter rising inflation – but only if the causes of the inflation can be controlled.

If you take out the global pandemic and the war in the Ukraine – Australia’s inflation rate would be around 2 per cent like it was in 2019 – prior to the Covid-19. Inflation is predicted to hit 7.7 per cent by the end of this year but will be back down to 2.75 per cent by 2024.

One of the biggest risks to Australia is the knee jerk reaction to inflationary pressures which has led to the Reserve Bank jacking up interest rates which will place a further downward pressure on investment and growth.

Monetary policy measures only work when global supply chains are running properly – at the moment they are anything but.

Our other biggest risk is every time Jim Chalmers opens his mouth and talks down our economy and up his ability to manage it.