Inflation live updates: Annual figures hit 6.1 per cent

Inflation live updates: Annual figures hit 6.1 per cent

Hi Chris, thanks for your question.

This is a great question. It goes to the heart of the problem we’re dealing with.

The Reserve Bank is facing conflicting demands.

On one hand, it wants to lift interest rates away from the emergency-low levels they hit in the pandemic so they stop distorting financial markets and property markets. It also doesn’t want people to think it’s lost control of inflation, so it wants to lift rates to keep people’s expectations “anchored.” But it also knows that if it lifts rates too quickly it could cause unemployment, and even a recession.

So, it’s trying to walk a fine line.

But your question about there being other possible options to address inflation is really interesting, and there’s debate about this point.

In the modern era, where “fiscal” policy (government spending and taxation) has fallen out of fashion as a demand management tool, except for during emergencies, central banks are expected to control inflation.

In previous eras, that wasn’t so.

During the 1950s, for example, when the Australian Government was facing much higher inflation than we’re seeing today, thanks to the Korean War, Prime Minister Robert Menzies decided to stamp out inflation by increasing taxes.

I have increased company tax, income tax, excise tax and sales tax. Among a list of other things.

At the time, the financial media dubbed it the “Horror Budget” (because of the higher taxes), but Arthur Fadden, the Treasurer who put the budget together, considered it one of the best budgets of his political career.

Anyway, that’s a long way of saying that you can suck inflation out of the system in different ways, using different tools, but tax increases have fallen out of favor in the modern era.

why?

Last month, the former Treasury Secretary Ken Henry a “windfall profits tax” on gas exports would help to reduce the price of gas for Australian households, which was a major contributor to current inflation.

And that’s just one idea.

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