I am sucker for Christmas time. I always blow our budget on food and presents but it is Christmas!
I worry though that this Christmas time those family budgets will be a lot harder to stretch. Over the past year inflation has come roaring back to life. With wages growing much lower than prices are rising, real wages have dropped for the largest amount on record over the past year.
For the first time in a generation, inflation may put a crimp on the size of the Christmas lunch this year.
According to the Australian Bureau of Statistics, food prices have increased by 9 per cent compared to last Christmas. This is higher than the average inflation rate of 7.1 per cent.
Let’s start with the (relative) good news. Leg hams, lamb and prawns have only increased by 3.8 per cent, 5.5 per cent and 5.8 per cent respectively. Although these increases are below the inflation rate, they are still higher than wage growth which has been 3.1 per cent.
However, you are not so lucky if you want a traditional Christmas of turkey (8.6 per cent increase), roast beef (9.3 per cent increase) and vegetables (17 per cent increase).
And it doesn’t get much better for dessert. The eggs for the pavlova have gone up by 10.4 per cent, the cream is up 12.1 per cent and the fruit on top is up 14.6 per cent.
Christmas is always a difficult time for families doing it tough and this Christmas unfortunately more families will be in dire straits. So if you can donate to good causes this Christmas, there is more reason to do that this year than most.
My job though is to try to push for policies that will avoid more Christmases like this one. To do that we must slay the inflation dragon.
Inflation is the problem of too much money (normally caused by too low interest rates) and too few goods and services being produced.
There are two ways to fix inflation. We can lift interest rates and soak up the excess money. This way hurts those paying back mortgages and the higher interest rates risks reducing private investment and possibly causing a recession. Paul Keating once remarked that we had to have a recession to tackle inflation.
But there is another way to reduce inflation and that is to produce more goods or, in other words, to lift our productivity. The best way government can help increase the productivity of businesses is to reduce unnecessary red tape.
Instead, in the new government’s first 6 months they have rushed through new industrial relations laws that impose new costs on small business and they have imposed the (in effect) nationalisation of the gas industry.
These policies will not increase our productivity and hence they will make tackling inflation even harder. It also means that the Reserve Bank will have to increase interest rates by even more to mop up the extra money that is causing inflation.
Maybe the Reserve Bank will be successful and next Christmas inflation will be lower. But if we have only achieved lower inflation by causing a recession that will not make buying the Christmas lunch any easier for Australian families.
Let’s hope that in the new year our new government rediscovers the need to support private business to deliver a strong economy and a lower cost of living.
