CONTINUOUSLY SINCE its election, the Rudd government has tried to convince us of the urgent necessity of reducing inflation. Why is it so worried?

The inflation rate, at 4.2 per cent for the January to March quarter, may be slightly above the Reserve Bank’s target range of 2 to 3 per cent, but it is not high by historical standards. In the high inflation period between 1970 and 1990 it averaged 9 per cent a year.

Although they won’t admit it, the government understands this. Despite all the talk about the need for savage cuts to government spending to tackle inflation, the scale of the cuts in the recent budget were modest. Peter Hartcher of the Sydney Morning Herald argued that overall spending had actually increased slightly, by 1.1 per cent above inflation. There were still some vicious cuts-including 1224 people sacked from the public service. But it does raise a question-why are Rudd and Swan spending so much time invoking the inflation monster?

Inflation worries business because its creates unpredictability.For example, fluctuations in prices make companies’ decisions about whether they will be able to repay a loan more difficult.

But it also scares them because it encourages workers to demand pay rises to keep up with the rising cost of living.

Kevin Rudd’s promises during the election campaign to ease cost-of-living pressures have built up workers’ expectations of change.

Labor’s argument about the need to “fight inflation” is aimed at dampening down these expectations and convincing us to accept lower living standards.

This serves to justify the continued underfunding of public services like health, universities and schools. It is also deployed to argue workers should accept wage cuts.

What’s causing inflation?

But it is not rising wages that are causing inflation. There are two main reasons for recent rises. Inflation has risen globally due to higher oil and food prices. Oil prices were at $US25 a barrel in 2003 and have recently touched $US138. The price of rice has more than doubled in the past year.

Much of this is due to speculation. Transactions involving oil futures on the world’s biggest market for oil, the New York Mercantile Exchange, have almost tripled since 2004.

Secondly, the continuing economic boom in Australia means there is high demand for goods and services, which pushes up prices. Underlying this is the money flooding into the economy from booming sales of Australian mineral exports.

The big end of town is awash with money. Yet Labor’s commitment to “economic conservatism” means they believe working people have to pay so that business can keep making record profits.

By James Supple

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