One big fight in this budget is going to be whether the government’s policies to reduce inflation are legitimate . They’ve “mechanically” reduced consumer price inflation via two policies: the $300 energy bill relief and increases to Commonwealth rent assistance. Together these spending measures “ directly reduce headline inflation by 1⁄2 of a percentage point in 2024–25 ,” the budget papers say .
Normally we fight inflation economy-wide and do so indirectly, via monetary policy and Keynesian policies that reduce spending overall. But in this case, the government is sticking its spanner right into what the Bureau of Statistics measures when it measures inflation. They’re literally cutting prices.
Is that allowed? Is reducing inflation by reducing prices a cynical sin? Or the wise action of a government that understands how the economy actually works? You’re going to hear the former a lot. Most aghast may be George Washington University assistant professor Steven Hamilton. He’s an Aussie and always says the only legitimate way to reduce inflation is to cool the entire economy, and anything that boosts aggregate demand is always going to cause more problems than it solves.
He’s got an incendiary piece in the Financial Review already and I bet his quotes pop up in the media a lot over the next few days. Cool the jets Certainly cooling the whole economy is how the RBA works. It works to reduce prices indirectly: taking money from people who might spend it,.
