Canberra must make the hard decisions now to control inflation

Reserve Bank of Australia (RBA) governor, Philip Lowe, has fired a warning shot over the bow of the federal treasurer by raising official interest rates another quarter of a percent this week to 3.85 percent.

The hard work on inflation has to be done by the government which has access to a large number of tools-fiscal and regulatory-to make it go away, while the governor really only has one blunt instrument-monetary policy.

While "the markets" were surprised at the rise, they shouldn't have been. The surprise was that Lowe sat on his hands at the last RBA meeting just before Easter and left rates alone.

Lowe has been easy to blame for inflation because he made a mistake a couple of years ago when he said that interest rates would not start to rise until 2024. And while it's true he should have been signalling tighter monetary policy, he was not alone in making this mistake.

He also had an accomplice in the federal government and its economic recklessness post-2008 and the Global Financial Crisis, which sees government expenditure, aka helicopter money, as the solution to every problem.

Many other central bankers and business economists, were also asleep at the wheel, including those at the Bank of England, the U.S. Federal Reserve, the European Central Bank, and the Reserve Bank of New Zealand.

That has resulted in each having CPIs (consumer price index) at, or over, 6.7 percent, compared to Australia's at seven percent, and a massive economic pile-up.

Broccoli for sale at a market in Melbourne, Australia, on July 27, 2022. (AAP Image/Joel Carrett)

The academic economists were even worse than their professional siblings, having gotten boozed-up on the funny money theory called MMT-Modern Monetary Theory to some, and Magical Monetary Theory to those few with a sense of history.

This is the idea that when interest rates are low, governments can borrow almost infinitely as long as the return is a bit higher than zero.

The Writing on the Wall

Economists and bankers should have been looking at the money supply, which was massively ramped up during COVID, so we could lock down and have a "no regrets" gap year from working hard while we sheltered in place to avoid the pandemic.

That would have told them that inflation was just around the corner as they printed all that money. In Australia's case, RBA assets almost tripled in 12 months.