Exploring Non-Traditional Paths to Curb Inflation: Treasurer Jim Chalmers

Key Highlights :

1. The Australian government is expecting unemployment to rise to 4.5 per cent in order for inflation (currently at six per cent) to return to the central bank’s target of two to three per cent.

2. The economic argument being that if the current rate of 3.5 per cent persists, inflation expectations “will rise”, she said at the time, “which will make it that much harder for the monetary authorities to bring inflation back down”.

3. A rise to 4.5 per cent would be higher than the “full employment” rate of 4.25 per cent.

4. The RBA’s prediction that upwards of 120,000 jobs would be lost in the year ahead to curb inflation stands in stark contrast to the $20 billion surplus the government is expected to have finished the financial year with, at least 40 per cent of which is attributable to a strong labour market.

5. While some economists fear that a sustained low unemployment rate will put pressure on wages and create a spiral, Dr Chalmers said the past decade had shown that the unemployment rate and wages outcomes had “been largely decoupled”.

     Inflation is a major economic concern for Australians, and the Reserve Bank of Australia (RBA) recently predicted that unemployment would need to rise to 4.5 per cent in order to bring inflation back down to the target rate of two to three per cent. However, Treasurer Jim Chalmers has said that Australians need not be frightened by the thought that only higher unemployment will ease inflation.

     In an interview with Sky News, Dr Chalmers said that the past decade has shown that the unemployment rate and wages outcomes have been largely decoupled. He said that there have been times in the last decade where the unemployment rate has been quite low, and even lower than the full employment rate of 4.25 per cent, yet wages growth has still been low.

     The Treasurer added that there are other significant determinants of inflation at play, such as the supply chain issues coming out of Ukraine and the services economy which is putting pressure on rent. To address this, the government has invested in building more supply to ease the pressure.

     In coming months, Dr Chalmers will release an employment white paper, with the first priority to be engaging with full employment. He said the government is looking to explore non-traditional paths to curb inflation, such as investing in more supply, rather than relying on the traditional argument that higher unemployment is the only way to reduce inflation.

     The Treasurer also said that the Albanese government has overseen the creation of more jobs in the first year than any new government on record, and that the $20 billion surplus the government is expected to have finished the financial year with is largely attributable to a strong labour market.

     Overall, it appears that the traditional argument of higher unemployment being the only path to getting inflation back under control may no longer be relevant. Treasurer Jim Chalmers has said that the government is looking to explore non-traditional paths to curb inflation, such as investing in more supply, and that the strong labour market and other external factors are also contributing to the current rate of inflation.

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