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.
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).
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:
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.