Unemployment is at historic lows. Is it possible to maintain this level without harming our future prospects?

The relationship between inflation and employment

  • Australian unemployment in the participating workforce continues to fall
  • CPI and wage inflation will continue to be fueled as we approach full employment
  • What are the likely outcomes of a move towards full employment and policy responses?

The current state of affairs

The Australian Bureau of Statistics (ABS) publishes a year-on-year (YoY) wage inflation index every quarter. Growth moderated during the pandemic but recovered quickly.

Unemployment in the participating labor force fell to 3.5% in June, with the participation rate rising to 66.8%.

The theory

Milton Friedman was a prominent leader in economic theory, and his work on the relationship between inflation and unemployment is often cited in economics textbooks.

The theory suggests that with Australia’s tight labor market, gradual changes in unemployment will have a more pronounced impact on wages and the resulting price inflation.

As companies fight for top talent from a tight supply, salaries are likely to rise rapidly.

Responses from decision makers

As current reality becomes more integrated into our living conditions and outlook, the Phillips curve will reset and changes in unemployment will have a more moderate impact on prices.

That’s not until the reset of corporate budgeting cycles, which will take place in more than a few months. Finance managers will worry about the impact of wage inflation on their net operating margins.

There is a risk that we will enter the third stage of this curve, with high and variable inflation which disrupts growth. This would be damaging to businesses and would rapidly increase unemployment.

It’s a tricky situation for the Reserve Bank of Australia (RBA) to navigate as Australia’s price arbiter, tasked with creating the green trading pastures of tomorrow.

Paul Volcker was Chairman of the Federal Reserve. Volcker’s monetary policies aimed at fighting inflation to achieve price stability have been proven to calm markets and improve long-term growth prospects.

It’s his playbook that’s most followed by policymakers around the world and that’s why we’re seeing such rapid interest rate hikes back home as Governor Philip Lowe attempts to stem the rise. prices.

Raising interest rates, incentivizing savings, and deferring investment versus spending are the main response in the policymakers’ toolbox. This is done at the expense of both the mortgagee and the borrower, but ensures that there are not too many unnecessary expenses, thus protecting future business growth and employment.

Energy inputs

International energy markets provide information on a wide range of goods and services and have been the source of global inflation with the displacement of supply from Russia and the reorganization of supply chains .

Recently passed EU legislation requires natural gas stocks to reach or exceed 80% capacity by winter this year and 90% next year. The forced stranglehold on importers has pushed maritime natural gas (LNG) to excessively high prices.

New demand for maritime gas from Europe is driving up prices for its allies, with Japan and Korea feeling pressured to compete for winter replenishment supplies.

High gas prices and replenishment needs kept coal demand high during the winter. Australian coal was one of the beneficiaries.

Europe has managed to get on the right track by paying through the nose for its gas and coal, but there is hope that it can get through the winter without further emergency action or limitation of consumer supply.

As inventories return to normal, it is likely that in the coming months we will find a peak in coal and gas prices, and core inflation may begin to retrace some of its recent rises.

Australia Reset

With little room for additional job growth without pushing up inflation, policymakers expect commodity prices to moderate. Ideally, through new supplies at home and abroad with a more productive workforce.

While we look forward to a situation where the price of basic consumables can peak and start to come back, a near future of moderation in policymakers’ responses and a slowdown in interest rate hikes becomes possible.

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