Rate rises and inflation
what is it and who is responsible?
Rate rises and inflation - what is it and who is responsible?
What’s on our mind: The RBA is punishing consumers for Australia’s “Inflation Problem”, but what about the Federal/State governments?
What happened this week: RBA raised its cash rate to 3.85%.
What we are watching next week: Treasurer Jim Chalmers to deliver the annual budget for 2023-24 (9 May - 7:30 pm AEDT), US inflation rate (10 May).
Prelude:
What’s on our mind:
This week the RBA delivered an unexpected rate hike.
The RBA cash rate is now 3.85% - the last time rates were this high was in ~2012.
The reason for unexpectedly jacking up rates? - Governor Phillip Lowe said the following:
“Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range.”
Lowe also said:
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe….”
With the rate hike, the RBA has made it clear that they will continue raising rates until inflation is in check.
This got us thinking:
What the heck is inflation? - At a high level, it measures price rises in the economy.
Who is to blame for the inflation problem? - The RBA will say it is the consumer - we think it is more of a government problem… (let's focus on this for today).
Why is the government using interest rates exclusively to solve the problem?
Who is to blame for Australia’s inflation problem?
According to the RBA, Australian consumers are to blame for the country's “inflation problem”.
The RBA believes that increasing rates can reduce consumer spending (lower demand) and eventually tame inflation.
But why is there no debate surrounding the government's role in any of this?
Since the COVID pandemic of 2020, the government has gone on a fiscal stimulus binge, increasing government spending at record rates.
In response to the COVID pandemic, the federal government got involved and pumped ~$507 billion of additional support into the economy, of which ~$257 billion was direct economic support.
For context on that number, the Australian economy is worth ~$2.2 trillion.
It isn't just the federal government spending like drunken sailors; state governments are also on a spending binge.
Over the last ~4 years, Victoria’s state debt has ballooned by almost 500% to all-time highs of ~$115Bn and is expected to reach ~$165Bn by 2025-26.
(Source)
So while the RBA tries to force everyday Australians to reduce spending, the governments are spending at record rates.
Ironically, Dan Andrews came out on Wednesday blaming everyone except himself and his government for the country's inflation problem and the state's debt issues.
(Source)
As for the Australian Government, gross debt has increased from $534.4 billion in March 2019 to $894.9 billion as of 28 October 2022.
Budget forecasts also estimate that by the year 2025-26, gross debt will be ~$1.159 trillion.
All of this spending at a time when everyday Australians’ real wages have been declining at record rates. (If real wages are falling, the average salary can buy less than the previous year).
(Source)
The following comment from Matt Grudnoff, (Senior Economist at the Australia Institute) sums it up pretty well:
“To blame workers for current inflation while they experience unprecedented real wage drops and companies post surging profits is economic gaslighting of the highest order.”
This made us think… is the government complicit in Australia’s “inflation problem”?
Why don't you be the judge?
Compare the last 12 months of your spending against all of the spending the government is doing.
Last year the NSW government was under fire for a budgeted $25M to install flags on the Sydney Harbour Bridge.
Eventually, the government had to backtrack after public outrage… we bet it would have cost double that had the budget gone unchecked…
(Source)
So out of touch with the everyday Australian is the government that prime minister Anthony Albanese announced a $240M commitment to build an AFL stadium in Tasmania.
Unsurprisingly the locals weren't happy - here is a video where a local quizzes the Prime Minister on why he isn't investing all that money into social housing in the middle of a “housing crisis”.
(Source)
Football stadiums aside, the government tore up a nuclear submarine contract with the French and had to pay $830M in penalties only to go and sign another deal with a long-term cost of $368Bn.
(Source)
Another recent spending commitment - the government pledged to increase military spending significantly.
Another area where costs have blown out significantly is the NDIS - the National Disability and Insurance Scheme.
The scheme, in theory, has all of the right intentions, but in the words of the NDIS minister, the scheme has “lost its way” AND has become a “cash cow” for unethical service providers.
(Source)
Now, estimates have the NDIS budget increasing to ~$115Bn by 2032.
For some context, the government spends less on Medicare right now…
On the topic of it being a “cash cow”, it is no surprise that since the NDIS was launched, Australian unemployment has decreased from ~5.5% to as low as ~3.5% (barring the COVID pandemic).
Last but not least, the hundreds of millions of $ spent on quarantine facilities that now sit idle (and worse) have been handed over to the billionaires who own the land the facilities sit on.
(Source)
The billionaire owner now plans to turn it into an “entertainment precinct”.....
All this spending, yet all blame for Australia’s “Inflation Problem”, is being placed on the everyday Aussie.
Concluding remarks:
We have been calling for a fall in property prices since June 2022, the month after the RBA started hiking rates.
Until now, the RBA had no choice but to raise rates and try to reduce economic demand.
While we agree with this approach, we don't agree with unchecked government spending, which is counteracting any of the impact interest rate hikes are having.
The everyday Australian is being forced to reduce spending while the government does the opposite - something we think won't last.
Where we think the property market is right now:
A weekend article from us wouldn't be right, with commentary on the property market.
The truth is not much has changed… listings are at all-time lows.
Total listings across the capital cities are at ~80,000 compared to ~90-100k in previous down cycles.
Our view is that as new completions come to market, this will correct - we covered all of this in a recent article which you can read here (or by clicking on the image below).
Thanks for reading,
Aus_Prop team.
You can contact us here:
On Twitter @Aus__Property
Via email at Auspropertymarket@gmail.com
Or through Substack - Property Down Under
Thanks for the write up, this was a good one