Inflation was 2023’s unavoidable topic. Will 2024 bring a change of tack from the RBA?

It was, as ever, a big year in the economy. We seem to always live in interesting times and this year, even though lockdowns were over and things seemed to get back to some sort of normal, was no different. “Normal” ain’t normal any more.

Cost of living ruled the narrative

It was impossible this year to avoid discussion of inflation and the rising cost of living. And yet, curiously, this year was when inflation fell – at much the same rate as it rose last year.

In the 10 months to the peak of December last year, inflation went up from 4.9% to 8.4%, and in the 10 months since December it has fallen to 4.9% again:

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This doesn’t mean all is fine, but it does remind us that even when inflation falls, it doesn’t wipe away the previous price rises.

People were still dealing with the impact of the price rises last year and, more importantly, the lack of relative wage growth.

In the past year the quarterly measure of inflation rose by 5.4% (to September) while wages grew by 4% – for a 1.3% fall in real purchasing power. But it comes off the back of a 3.8% fall in the prior 12 months.

All up, real wages have fallen by 5% since September 2021.

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But that’s only if we compare wages with the CPI. If we compare them with the employee households cost-of-living index, then real wages actually fell by 4.6% this year and a total 7.7% drop over the past two years.

That’s because the cost-of-living index counts mortgage repayments, whereas the CPI does not.

Interest rates went up as the Reserve Bank tried to make unemployment rise

Let’s not sugarcoat it. The RBA might say it was raising interest rates to lower inflation but only because it believes the only way to lower inflation is to raise unemployment.

And so since April last year it has increased the cash rates by 425 basis points, some 250 basis points more than it raised rates during the mining boom period from April 2006:

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A big difference between now and then was that in September 2007 real household consumption was booming – it was 6.1% higher than it had been the year before – whereas in September this year households consumed a mere 0.4% more than they did a year ago.

The impact of the rate rises has been such that in the past 18 months the level of interest payments in real terms for households has risen as much as it did over five and half years from the end of 2002 to the middle of 2008:

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That is a massive stomping on the economic brakes.

So devoted was the RBA to slowing the economy and causing unemployment to rise, that it raised rates again in November even though household spending had flatlined in the September quarter.

Inflation driven by profits or are we back in the 1970s?

The big debate about inflation this year was what caused it. My colleagues at the Australia Institute and I analysed the national accounts to argue that corporate profits were the main determinant. This accorded with similar research done by the OECD, the IMF, the European Central Bank and the US Federal Reserve.

The RBA disagreed, suggesting that you can’t include mining profits because Australians don’t pay things produced my miners (which might be news to everyone who has heating, cooking and electricity). The RBA prefers to believe inflation is due to households having too much money. This allows it to use the one tool it has of raising interest rates.

With luck, next year the RBA will realise that when real per capita household incomes are down by 6.6% over the past year and our living standards are back to where they were in 2014, inflation is probably not about us all feeling very flush:

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Unemployment remains low, but slowly rising

For the past 30 years or so we have let the RBA decide how many people should be out of work.

The biggest economic policy shift this year was the government’s employment white paper. It took issue with the RBA’s version of full employment as being the level of unemployment where inflation is not rising.

The white paper instead argued that full employment is “where everyone who wants a job is able to find one without having to search for too long”. Importantly and in a nice rebuke to the profit-driven, privatised employment services sector, it argued that that does not mean any job, but rather “decent jobs that are secure and fairly paid”.

This was a marked change to the “non-accelerating inflation rate of unemployment” (Nairu) definition and was clearly the result of much debate within government between the Department of Employment and the more conservative Treasury.

But alas in December the treasurer issued the statement on the conduct of monetary policy in which he told the RBA to “focus on achieving sustained full employment, which is the current maximum level of employment that is consistent with low and stable inflation”.

Nairu, that awful economic zombie, was back from the dead.

Fortunately, the RBA has not succeeded at raising unemployment to the 4.5% it believes is necessary to get inflation back to below 3%.

Employment growth has slowed, but remains bolstered by higher levels of migration:

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Unemployment has also remained low. It started the year at 3.7% and is now 3.9%.

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That unemployment has risen by just 0.2 percentage points in the period that inflation has come down from 8.4% to 4.9% might make one reconsider whether we need to increase the number of people without a job just to get inflation back to 3%.

And with that we head to Christmas, looking towards a year when economic growth is expected to be low, but hopefully not so bad as it could be (unless the RBA keeps raising rates), competition in the retail and wholesale sectors will come under the microscope and the debate over stage-three tax cuts will continue all the way to the budget.

Have a merry Christmas and I’ll see you again in 2024!

Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work