RBA's Inflation Strategy Under Fire from Economists

The Reserve Bank of Australia's (RBA) governor Michele Bullock seems to be at odds with some economists who are calling for new frameworks to manage inflation. According to Ben Spies-Butcher, chief executive of the Centre for Future Work, the bank is using an outdated playbook that fails to account for supply shocks caused by severe weather events and conflicts like the invasion of Iran. This phenomenon is being referred to as 'shockflation.'

Shockflation contrasts with the early 2000s when cheap imports from China and other emerging markets drove down prices. However, policy makers are still relying on an old regimen for controlling inflation that involves independent central banks adjusting interest rates to keep price rises within a tight target band.

Spies-Butcher argues that this approach is no longer effective in today's world where workers have more bargaining power and the chances of wage-price spirals are low. He claims that the RBA's strategy is to 'crunch demand' by raising interest rates, which puts a heavy burden on indebted households who played little part in creating the problem.

The RBA has raised interest rates 13 times since May 2022, making it the most aggressive monetary policy tightening in Australia's history. This has led to people taking on extra work or multiple jobs just to meet their mortgage repayments. The International Monetary Fund notes that those who are highly indebted with variable mortgages tend to be those with lower household incomes and less likely to have a university degree.

Some economists, like Isabella Weber, a German economist, are exploring alternative ways to deal with supply shocks driving up the cost of living. They propose creating early warning systems to anticipate supply problems in critical sectors such as energy, chemicals, and food, and building up strategic reserves to stave off price increases.