A series of graphs

This morning the ABS released the June quarter CPI figures:

The CPI rose 3.0% through the year to the June quarter 2014, following a rise of 2.9% through the year to the March quarter 2014.

So I thought it might be interesting to track how inflation (measured by % change in CPI) and unemployment have fared since the December 2007 quarter.

Stagflation 1

The broken black lines at the 2% and 3% levels are the RBA inflation bands while the broken black line at 5% is the Treasury guesstimate for the NAIRU (non-accelerating inflation rate of unemployment).

As can be seen since mid-2012 both series have been moving in the same direction – up. The correlation between inflation and unemployment since March 2012 to the present is 0.92. The correlation over the period 1995 to the present is -0.33.

At the same time GDP growth since December 2007 has been sluggish by post-90′s recession standards. In the graph below I show annual GDP growth and compare it to average GDP growth calculated from the March 1992 quarter to the present (that’s the black broken line).

Stagflation 2

Since the GFC in 2008, Australia has experienced 3 quarters of above trend GDP growth – one of those was the March 2014 quarter and is subject to revision. In short – apart from 2 quarters in 2012, Australia has experienced below average economic growth.

Then I thought I should plot unemployment and inflation together to see what’s going on:

Stagflation 3

I have included the RBA inflation bands and the Treasury NAIRU guesstimate. The result makes intuitive sense – When unemployment has been below 5%, inflation has tended to be high – at or above the RBA 3% bound.

The red dot represents the June quarter outcome – unemployment is at 6% – well above the NAIRU and inflation is at 3% on the RBA upper bound.

So what is going on here? As I argued in 2011:

A combination of policies must be pursued to get the economy moving.

Monetary policy alone cannot solve the problem. Increasing interest rates to deal with the inflation problem will simply slow the economy even further. Yet inflation cannot be allowed to continue.

Government spending isn’t the solution either. In fact it is a huge part of the problem. Most government spending is simply not productive and doesn’t add value to the economy. Sure some government spending – the legal system and law and order – is very valuable, but diminishing returns set in very quickly.

Getting the economy moving again means less crowding out and more private sector expansion. Right now productivity is low because the government spends too much, taxes too much and regulates too much.

At the time I was being critical of Wayne Swan – but the same criticisms apply to Joe Hockey. Today it is being reported that Hockey wanted more tax increases in the budget:

“In reality, the budget was much softer than Joe would have liked,” says the biography by journalist by Madonna King.

“He wanted changes to pensions made earlier and the deficit levy to net more taxpayers.

“But Abbott, who chaired each of the expenditure review committee meetings, was taking a much more cautious approach than his treasurer, no doubt with one eye firmly on the reaction of voters.”

The economy is misfiring and has been for a long time. The problem has been masked by a few low inflation figures and a high Aussie dollar. At some point our friends in Canberra are going to have to wake up to the fact that spending and taxation are going in the wrong direction, and unemployment and inflation are going in the wrong direction too.

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29 Responses to A series of graphs

  1. Andrew

    Could you please also add a list of all the other countries outside Europe who suffered rising unemployment during the Gillard term?

    Oh wait, I see you did – after

    unemployment and inflation are going in the wrong direction too.

  2. Gab

    Excellent post! Now that‘s why I keep reading the Cat.

  3. H B Bear

    Not much to get enthusiastic about there.

    Maybe Clive and Jacqui can do something about it?

  4. Bruce of Newcastle

    So what is going on here?

    The Inflation vs Unemployment graph is revealing. The latest data is on the extreme upper edge of the anticorrelationary trend-line.

    That reeks of bureaucratic impediments to employment and investment.

    On the other hand the repeal of the carbon tax should act by moving us back to the regression line, by both increasing the return for investment of additional labour and reducing the inflationary impact of forced price rises.

    Removing RET would be the second stage of the booster rocket.

    Get the government out of our necks, Mr Hockey, and we’ll do the rest. Otherwise we’ll stay exsanguinated.

  5. Could you please also add a list of all the other countries outside Europe who suffered rising unemployment during the Gillard term?

    Quit the snark and make a point.

    Hiding your message in snarky rhetorical questions and sarcasm is the refuge of someone who doesn’t actually want to engage in discussion.

  6. Andrew’s point as far as I can tell is this: “Whatever happened to the economy during Gillard’s time in office isn’t her fault because of the GFC.”
    Never mind that Sinclair wasn’t actually criticising Gillard’s policies in this post. Never mind that he wants do defend Gillard’s honour but not Rudd’s. Let’s leave those aside.

    The key point, Andrew, is that Gillard,Swan, and Rudd claimed to have saved Australia from the GFC and blew billions of dollars in doing so, so unfortunately for them (and for you) any deterioration in the economy is on them.

    Either they saved us from the GFC (billions well spent) or they didn’t (billions wasted). My opinion is the latter.

  7. Pyrmonter

    Might be interesting to overlay this:

    http://www.roymorgan.com.au/findings/5481-roy-morgan-inflation-expectations-february-2014-201403120443

    as well as a measure of wage inflation rather than CPI.

    A difficult thing to measure, but possibly more significant in terms of labour markets (or SD had a pauline conversion to crude undergraduate Phillips Curve / Keynesian inflation/unemployment models?)

  8. Biota

    +1 Gab

    Hockey reminds me of some employees of mine a few years ago. They were all paid well above any relative salaries but some who couldn’t mage money always wanted more. Looking for savings was never on the radar. One guy whinged about not getting enough until I pointed out that he hadn’t banked a pay check for a month. Oh! There it was between the lounge cushions.

  9. Bear Necessities

    Good analysis Sinc,

    Also notice how the unemployment rate starts increasing from Dec 2010. Isn’t it around this time that the Fair Work Act came into full effect?

  10. Myrddin Seren

    Extrapolating my own situation ( subjective – but there you go )

    I believe unemployment is understated, because I suspect there are a lot of others like me who have no regular employment income and have not yet crumbled to line up at Centrelink for a few hours to apply for Newstart, in the hope that something will come along before the money and pride runs out.

    If the Coalition are deluding themselves that the hollowing of he economy is only impacting obvious sectors like car line AMWU workers with vocal unions, and not the accountants, HR, IT and assorted other middle class groups being filleted and not yet picked up in the stats – they deserve the hell that will be unleashed upon them in due course.

  11. Mick Gold Coast QLD

    From Myrddin Seren at 6:52 pm:

    “If the Coalition are deluding themselves that the hollowing of he economy is only impacting obvious sectors like car line AMWU workers with vocal unions, and not the accountants, HR, IT and assorted other middle class groups being filleted and not yet picked up in the stats – they deserve the hell that will be unleashed upon them in due course.”

    But how? – the electorate here just demonstrated it is stupid enough to invite Labor back in to finish the demolition works that criminal Bligh embedded. Would it do similarly federally?

    We’re buggered really.

    Newman and Abbott ought to have taken to cost cutting, from the very first day, with a squadron of tanks driving through any public service sheltered workshop that does not contribute positively to the economy, leaving the bludgers, fake cripples, junkies, overweight hospital clerks and coppers and the motley assortment of trough gluttons lying in their wake. Why they continue the now self propelled revolving bank note printing machine that is child care is beyond me.

    They didn’t and we’re stuck with Big Gobbed Fatso Palmer spiking the LNP budget as payback for Newman failing to grant him the Bowen Basin and Emerald at a peppercorn rent. Labor can kick back with its feet on the desk while that galah does the heavy lifting for it.

    This is the most protracted recession I have seen since I started paying attention in about 1970 and yet many business people are recently speaking of a looming worsening of sales, unemployment and finance costs.

    In this last week I found our local major post office customer numbers have dropped by 66% since 2006 (they say most of it is due to reduced business activity) and the motor registry has closed its car dealers servicing section altogether. Sinclair demonstrates that four significant measures are heading in the wrong direction.

    Bloody marvelous, eh?

  12. hzhousewife

    Hockey reminds me of some employees of mine a few years ago. They were all paid well above any relative salaries but some who couldn’t mage money always wanted more. Looking for savings was never on the radar. One guy whinged about not getting enough until I pointed out that he hadn’t banked a pay check for a month. Oh! There it was between the lounge cushions.

    lol. We were taken to Fair Work by an employee and had to do mediation over the phone – he wanted six week severance, we offered two, settled for four as you do. When he handed in his vehicle there was an unopened envelope with two weeks pay in cash in the glove box. He never came by to collect it.

  13. JohnA

    At the time I was being critical of Wayne Swan – but the same criticisms apply to Joe Hockey. Today it is being reported that Hockey wanted more tax increases in the budget:

    Both Mr Swan and Mr Hockey are advised by the same Department heads.

    ‘Nuff said!

  14. Motelier

    From a small business.

    We are located in two businesses about 300 km apart.

    We first noticed a downturn in ( a hiccup) in 2010.

    The big downturn happened in Feb of 2013.

    If other small businesses have done what we have done, then the official figures are masking a far greater problem.

    We have cut costs as income has declined and fixed costs have risen. The costs that have continued to increase are the governmental fees, rates, charges and compliance costs.

    While we have people riding on the back of the risk takers and entreupeneurs of business we are always going to struggle.

  15. Myrddin Seren

    Mick

    We’re buggered really.

    Yes – I thought the last election was the only hope to turn the Titanic of State around before we hit the iceberg.

    I fear we are now 3/4 speed to disaster, as opposed to full speed ahead under the former government.

    If our terms of trade collapse should our trading partners get a major economic hiccup – then we are f**ked.

  16. Mick Gold Coast QLD

    From Motelier at 8:52 pm:

    “From a small business.

    We have cut costs as income has declined and fixed costs have risen. The costs that have continued to increase are the governmental fees, rates, charges and compliance costs.”

    That is so wrong.

    These damned bureaucracies are there to service a specific purpose, not to protect and perpetuate their own existence. There has clearly been a reduction in what they have to do and they bloody well ought to be cutting every cost they can find to reflect that, as well as the extortionate fees they impose.

    The public service was a crazy growth industry under that sheila Rudd and the slag who followed, while the people who paid their wages suffered. You can bet your life the local councils in which your businesses are located have maintained employment levels and increased their rates every year.

    It infuriates me that they sail blithely on in their protected bubble taking more to fund themselves rather than doing what everyone else must do.

  17. MartinG

    Hockey wanted more tax increases in the budget:

    Abbott and Hockey, the dynamic duo of economic destruction.

  18. .

    I wonder if people will now protest about stagflation?

    It happens. It will always happen after enough monetary and fiscal pump priming.

  19. Motelier

    Mick,

    Unfortunately we have no choice.

    I really do sit on my knees and await the government that STOPS the increases in government charges.

  20. Motelier

    I wonder if people will now protest about stagflation?

    It happens. It will always happen after enough monetary and fiscal pump priming.

    Dot,

    I made an argument for a price freeze last year. I got keybashed, which may have been appropriate at the time.

    My argument was because of the contracts that most small traders have entered into.

  21. Squirrel

    “Getting the economy moving again means less crowding out and more private sector expansion. Right now productivity is low because the government spends too much, taxes too much and regulates too much.”

    As others have pointed out “government” here includes State/Territory and local governments – as Mick so pithiliy puts it “It infuriates me that they sail blithely on in their protected bubble taking more to fund themselves rather than doing what everyone else must do.”

    It is ridiculous to expect Australian businesses to face global competition (to the benefit of consumers, including those who make their comfortable incomes in still protected sectors) while carrying the current regulatory and taxation burden.

  22. Matt

    Sinclair, curious to read your thoughts on CPI as a measure of inflation. Is the problem really worse than reported because the measurement is wrong?

  23. Chris M

    Interesting…. it would be great to see these graphs using more realistic data – like actual unemployment which is around 12% etc.

    The costs that have continued to increase are the governmental fees, rates, charges and compliance costs.

    Totally agree, found the same. Council rates in particular, +7% pa if they can get away with it, generously drop it back to 6.2% if there is an outcry.

  24. .

    Price freezes aren’t the answer, mot. You need to stop money losing its value, but allow for price rises where they are necessary – I’m sure we’d rather high prices for fuel than shortages (then we realise about 40% of the cost of fuel is explicit indirect taxation…)

    Capping the M1 target to be the same as real output is a way to do it – money demand will equal the supply of money. Inflation will be targeted to zero.

    Reducing government spending and taxes will make goods and services in the private sector cheaper.

    Removing excise tax and payroll tax would surely make sense to you as a producer and as someone who serves customers discretionary items?

    It will always work to cut spending as public sector productivity is lower than the private sector.

  25. Makka

    Govt’s of all stripes, – Federal, State , local and their mates in utilities provision – are all about protecting empires. We can forget about cutting costs and bureaucracies when these parasites are intent on preserving them. Costs , fees, taxes, charges, levees call them what you want are rising because these leeches are doing their level best to preserve themselves and their mates who support them.

    Nothing is going to change until the economy falls over and badly. Even then these elitist scum will tinker about the edges without addressing the real problem- Big Govt is breeding Bigger Govt and taking an ever larger piece of earned private wealth to preserve itself.

  26. Andrew

    Andrew’s point as far as I can tell is this: “Whatever happened to the economy during Gillard’s time in office isn’t her fault because of the GFC.”

    Actually my point is the exact opposite. The Gillard term (mid 2010- mid 2013) saw rising unemployment. While not unique (PARTS of the EUssr also experienced rising unemployment, and the EUssr as a whole did), I can find NO developed country outside the Carbonzone that did so. In fact, even of the EM, you would have to go down to tiny economies like Philippines, Iran to find the extremely rare exceptions.

    Gillard blamed everything (soaring unemployment, soaring deficits, the death of the mining boom) on the GFC. My thesis is that the civilised world was actually well into a modest recovery by then and the GFC provides no defence.

    Rather, Australia concocted a uniquely bad set of policies (copying the highly successful carbon price / ETS framework so beloved of the filthies in Spain, the worst of the Kenyan Stimulus, and adding the MRRT) to ensure it underperformed the rest of the world during the greatest commodity bubble in a lifetime.

    I have made that case many times, and didn’t want to repeat myself. I thought a reminder that no other ex-EU country (the empty set at the end of the post) suffered rising unemployment during the Gillard term was sufficient.

  27. .

    Actually my point is the exact opposite. The Gillard term (mid 2010- mid 2013) saw rising unemployment. While not unique (PARTS of the EUssr also experienced rising unemployment, and the EUssr as a whole did), I can find NO developed country outside the Carbonzone that did so. In fact, even of the EM, you would have to go down to tiny economies like Philippines, Iran to find the extremely rare exceptions.

    Excellent point. She was a disaster. As was the aftermath of Swan’s fiscal recklessness.

  28. Actually my point is the exact opposite. The Gillard term (mid 2010- mid 2013) saw rising unemployment. While not unique (PARTS of the EUssr also experienced rising unemployment, and the EUssr as a whole did), I can find NO developed country outside the Carbonzone that did so. In fact, even of the EM, you would have to go down to tiny economies like Philippines, Iran to find the extremely rare exceptions.

    Gillard blamed everything (soaring unemployment, soaring deficits, the death of the mining boom) on the GFC. My thesis is that the civilised world was actually well into a modest recovery by then and the GFC provides no defence.

    Yes, that is an excellent point.
    I apologise for misinterpreting you… but those are the risks you run when you make complex points in an ironic, indirect way.

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