It’s like a movie: the path to success goes via a place none of us wants to visit.
We all want unemployment to stay low—for there to be choice in the labour market and a wide range of job opportunities—but to kill inflation it appears likely unemployment will have to go up.
The most recent data shows a small uptick in the unemployment rate from 3.5% to 3.7%. Rising unemployment is precisely what all these interest rate hikes were expected to cause and the surprise so far is that it hasn’t gone higher. So how much higher will unemployment have to go before the threat of inflation is neutralised?
I’m afraid we may need a long period of hurt to get the happy ending. In the most miserable scenario we get a recession: this is a sharp burst of economic unhappiness where unemployment rises sharply. Look on the chart above and you can see scenarios like that in 2008, 2020, and so on It usually takes a long time to recover from that, with 2020 being an exception due to extreme government spending over the pandemic period.
Here’s the awful paradox the Australian economy is facing. Inflation is just price rises, added up across millions of products at millions of businesses. And what stops businesses lifting prices? It’s when business slows. For example:
A plumber whose phone is running off the hook can add 10% to invoices.
A café that runs out of muffins by 10.30am can put their price up by 50 cents.
A hairdresser with no more space available this month can add $10 to a haircut.
But if the phone stops ringing, the muffins get stale, and the booking sheet is bare, businesses stop hiking prices. They may even cut prices if they have margin or if they have no margin, they might even scale down or go broke, letting staff go.
We are certainly seeing evidence of more businesses going broke, as the next chart shows. Insolvencies are back up higher than pre-pandemic levels.
This is precisely what the RBA is trying to do. Make business hard. If families have less to spend because of mortgage stress, asset values are falling, or companies aren’t spending borrowed money because the cost of borrowing is high …then business slows. And then, the thinking goes, prices might stabilise or even fall.
Cooling the economy to prevent price hikes doesn’t work for all businesses or sectors. Petrol prices are mostly driven by global factors, for example. And we can’t easily cut back on some items, such as electricity, no matter how high their price might rise. But the RBA doesn’t care: they will try to squash whichever prices they are able to.
See the entire article on Arizona’s unemployment, or, read more Arizona real estate investing news. The choice is up to you.