WHAT NEEDS TO BE DONE ABOUT IT?

Words by Theo Goldsworthy-Hess

Why is Australia and the rest of the world experiencing the highest levels of inflation since the 1970s? Prices of petrol, food, and rent amongst other goods have sharply risen this year which has caused global cost-of-living crisis. You have probably heard that this has been caused by the supplychain-crises during the pandemic, China’s lockdowns as well as the war in Ukraine, but how these events have actually caused prices to rise is rarely ever explained in detail. Once we look into the details, we realise that the current inflation crisis is the result of an overly efficient global supplychain system which favours profit over security.

The predominant explanation for inflation is the supply-chain-crisis, which is said to have been caused by the lockdowns during the pandemic which reduced demand dramatically, causing recessions in most industrialised countries. The government sought to reduce the damage via quantitative easing, which essentially entails injecting the economy with cash and reducing interest rates to nothing in order to increase demand. Thus, when the lockdowns ended, demand exploded, and global supply-chains were unable to supply freshout-oflockdown consumers flush with government cheques. This resulted in corporations increasing the price of goods in order to reduce demand so that supply-chains could be fixed and eventually return to normal. The crisis then worsened in February when Russia is one of the world’s most important suppliers of critical commodities such as oil, gas, minerals, and grain, when the sanctions were imposed, a massive shortage in grain, oil and gas appeared. This forced supply-chains into further chaos which resulted in higher than ever petrol prices. Other events such as the lockdowns in China only saw to exacerbate the crisis. These analyses are generally correct - however, they fail to address the problem at the core.

For example, why did supply-chains collapse during the pandemic? The reason is mainly to do with overefficiency and choosing profit over security. Modern-day supply-chains are extremely efficient but are equally vulnerable to any sort of disruption. Shipping ports are built to a capacity that can just manage the expected traffic; if ports are built with a large margin of safety, there will be excess capacity that produces zero revenue, decreasing efficiency. When the pandemic hit and billions of people across the world entered lockdown, demand halted, with ships stuck in Asian ports waiting to be filled up once demand recovered.

The problem was that eventually, demand for goods not only recovered but accelerated, owing to government stimulus cheques. Ships returning to offload goods from Asia now had nowhere to put them as the ports were already full of empty shipping containers ready to be shipped off

to Asia. Thus, this massive surge of demand that occurred at the end of lockdowns has acted to expose the vulnerability of what has been called ‘just-in-time’ supply-chains. With the global supply chain in a mess, inflation began to arise. The situation was not great. However, if nothing else happened in 2022, then inflation would not be as bad as it is now, and the problem would be on its way to being resolved. But things took a turn for the worse when Russia invaded Ukraine in February earlier this year, causing inflation to rise 6.1% here in Australia with the US recording a 9.1% increase, and the U.K seeing a rise of 8.5%.

One of the major concerns with the current inflation crisis is that there has been minimal, if any, wage growth in the past decade. This means that inflation will hit working people the hardest as their wages will struggle to keep up with hiked prices. This coupled with the reserve bank increasing interest rates means that people will also have to pay more interest on their home loans. The reason the reserve bank increases interest rates is to reduce demand in the economy. By doing this, it will technically allow supplychains time to reorganise and decrease prices. However, this strategy runs the risk of starting a recession, and while this appears unlikely in Australia, it is looking extremely likely for the U.K. The government claims that the next year and a half will be tough for Australians but is ultimately necessary in order to get inflation under control. The problem still remains that even when inflation is taken care of, which will likely happen at the end of 2023, real wages will likely be even lower than they were in pre-Covid times. This is because when inflation stabilises, they will still stabilise at a higher price then they were before. This would not be a problem if wages increase along with these prices increases, but the wage growth as currently forecasted is less than optimistic, predicting even lower wages with the stabilisation of inflation. This is self-evident by the fact that wages have grown a measly 2.6% during the past year, which is nowhere near the 6.1% increase in prices that Australians have endured. It is clear then that monetary policy is not the only mechanism that can solve the inflation problem. What Australia needs is strong wage growth that will at least keep Australians in a similar position if not better than pre-Covid. The only way to achieve this is through major industrial action. With a newly elected government that is slightly more sympathetic to workers concerns, now is the perfect time for unions across the country to demand higher wages.