Australia’s annual inflation rate has reached its highest level since Bob Hawke was in office in 1990 and is expected to rise further in the coming months.
That means the Reserve Bank will almost certainly hike interest rates again at next Tuesday’s meeting to put more pressure on tight budgets to keep inflation under control. Economists forecast a sharp rate hike of 50 basis points.
So there’s a lot more economic pain to come. It’s certainly not welcome. But a bold experiment conducted abroad (some might use a less flattering adjective) shows us why this monetary tightening is necessary.
“Illiterates or Traitors”: The Nation’s Great Gamble
While the rest of the world has tightened monetary policy to cope with rising global inflation, Turkey’s central bank has stubbornly kept interest rates unchanged since January.
In fact, it actually cut the rate significantly in the last third of 2021, bringing it down from 19 percent to the 14 percent it remains at now.
The central bank chose this approach under constant pressure from Turkish President Recep Tayyip Erdogan, who actually believes in higher interest rates fuel Inflation.
Conventional economic wisdom is reversed. It states that high interest rates curb inflation and looser monetary policy fuels it.
In a speech in May, the President defended his gamble and branded those concerned about Turkey’s monetary policy as “illiterate”.
“Those trying to force a link between interest rates and inflation are either illiterate or traitors,” he said.
“Pay no heed to the ramblings of those whose only quality is seeing the world from London or New York.”
Some of the alleged illiterates who opposed Mr Erdogan’s rate cuts were once members of the central bank. No longer. He has repeatedly dismissed such votes from the panel, and it is now led by its fourth governor in four years.
The consequences of Mr Erdogan’s experiment were clear.
A year ago, Turkey’s inflation rate was a worrying 19 percent. By the end of last month it had risen to a staggering rate 79 percentthe highest in 24 years, and 16 times the central bank’s inflation target of 5 percent.
Some experts believe the government’s official estimate is actually a gross underestimatewith the true inflation rate somewhere in the triple digits.
Professor Steve Hanke of Johns Hopkins University has called the official figure “total fiction” and estimated the true rate at 128 percent.
“Total failure”: Erdogan’s experiment backfires
Incidentally, if you look at the world from London, you are currently experiencing an inflation rate of 9.4 percent. Over in New York it’s 9.1 percent.
That’s far more inflation than either country would like — hence the Federal Reserve is poised to announce another rate hike this week — but it’s preferable to 80 percent.
While Turkey’s economy is still growing despite this runaway inflation, its currency has been decimated. The value of the lira plummeted 44 percent last year and has fallen another 26 percent this year, hitting a record low against the US dollar.
Businesses cannot make long-term plans because of the volatility of the economy. And while the wealthy Turks are doing well, most of the population is struggling.
A recent poll found that more than a third of Turks were unable to afford their basic necessities and another 44 percent were just making ends meet.
“The poor suffer most from inflation, but middle-class Turks suffer too” The economist noted in a column about the situation last week.
“As their spending power dwindles and their job security erodes, many are falling out of the middle class and feeling both fear and anger.”
As early as May, when the inflation rate was *only* 70 percent, leading economists called Erdogan’s experiment a “total failure”.
“It’s about food and energy price increases, but also about the spectacular failure of monetary policy in Turkey,” said Timothy Ash of Bluebay Asset Management, for example.
“It’s about the pathetic and total failure of Erdogan’s unorthodox monetary policy.”
The President remains unperturbed. He has blamed foreign interference for his country’s soaring inflation.
Australian inflation hits its highest level in decades
Australia’s Consumer Price Index (CPI) rose 1.8 percent in the June quarter, with our annual inflation rate rising to 6.1 percent, according to data released this morning by the Bureau of Statistics.
That sounds tame compared to Turkey. Indeed, it is the highest annual rate in this country since December 1990. And it is well above the RBA’s inflation target of 2-3 percent. This increases the pressure on the RBA to raise interest rates again.
At noon, Treasurer Jim Chalmers from Parliament House in Canberra said he was “not surprised” by the new inflation data, although it made it no less “confronting”.
“This is nothing new for millions of Australians who feel this inflationary challenge every time they go to the supermarket and every time the bills come in. This inflation result reflects the lived experience of Australians who are struggling at the moment,” he said.
“Inflation is high and rising. It gets harder before it gets easier. The reality is that the quarterly result has not yet taken into account the increase in electricity prices in July.”
dr Chalmers said the government is focused on tackling the supply chain issues.
He said the global economy was “on a precarious and dangerous path” and worse was yet to come.
“Inflation in the economy is primarily, but not exclusively, global,” he said.
“I think Australians understand when they are in the supermarket when prices are going through the roof that this challenge is partly global and there are also domestic components to this challenge.
“I wanted to reassure them that the government is very focused on these domestic factors.”
The Treasurer said the “illegal, immoral invasion of Ukraine has had dire consequences for energy and food security, and we are all feeling the same around the world.”
He also pointed to China’s continued push for a “Covid Zero” policy as a key global factor.
dr Chalmers told Australians they would expect updated forecasts for inflation, wages and economic growth in his economic ministerial statement, due to be presented to Parliament tomorrow.
“Inflation will get worse before it gets better. But it’s getting better,” he said.
“There will be difficult times ahead of us.
“My ministerial statement tomorrow will show the combined impact of rising interest rates and slowing global growth on our own economic growth here in Australia. It will be confrontational.
“What you can expect in tomorrow’s ministerial statement is inflation revised significantly upwards, growth revised downwards and all the implications that entails.”
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