News Analysis
Australia is lagging considerably behind the United States in combating inflation, with recent data showing a vast disparity between the two nations.
Australia’s annual cost price index (CPI) was 6 percent in the April–June quarter, marginally lower than the 7 percent reported for the period ended in March and 7.8 percent in December 2022.
Meanwhile, the current annual rate of U.S. inflation rate sits at just 2.97 percent, a significant drop from 4.05 percent reported last month and 6.45 percent in December last year.
Asset prices in numerous sectors across the U.S. economy have demonstrated this trend, as the nation heads into what analysts claim could be a sustained bull market.
Not only has the S&P 500 gained over 6 percent from June and is up 16 percent heading into the third quarter, but the Dow Jones Industrial Average has risen for a 13th consecutive day, with optimistic investor sentiment gearing towards technology and growth stocks as well as cryptocurrencies.
With 11 and 12 respective interest rate increases of similar magnitude in both the United States and Australia, the discrepancy in economic performance could come down to labour market and energy policy—drivers of inflation that cannot be directly addressed by central banks.
Energy Prices High Down Under, Not So Much in the US
Australian energy prices continue to rise, with wholesale prices increasing to their second-highest March quarter in 18 years.A recent report from the Australian Energy Market Operator shows a 31 percent increase in wholesale prices in the National Electricity Market (NEM) from $83/MWh in the first quarter to $108/MWh in the second quarter.
The increase is likely due to a number of mandated closures of coal-fired power stations across the nation as Australia pushes to transition toward net zero.
Specifically, the closure of Liddell Power Station in Muswellbrook, New South Wales, in April has shown a notable impact on prices.
A report by the Australian Energy Regulator in June showcased this reality, attributing inflation in wholesale energy market prices to a combination of spiking demand and a reduction in grid capacity.
“Average [National Electricity Market] prices did increase from the preceding quarter in mainland regions. This reflected higher demand, a seasonal decrease in solar generation, and a reduction in total capacity offered partly due to the exit of Liddell Power Station,” the report said.
“These factors drove a need for increased generation by more expensive gas and hydropower stations. In addition, significant price events also contributed to average prices being higher in Q1 2023.”
In comparison, the United States is currently enjoying an abundance of affordable energy that is creating a softer landing pad for its economy, with analysts from the Energy Information Administration projecting a 37 percent decrease in average wholesale energy prices from 2022 to just $51.36/MWh by the end of 2023.
Labour Market Policies Also Differ
The other significant driver of inflation in Australia is its relatively rigid labour market that looks to be further tightened with a string of new legislation implemented by the Albanese Labor government.Earlier this week, Minister for Employment and Workplace Relations Tony Burke announced the federal government’s intention to introduce reforms that will compel businesses to employ casuals as permanent workers if they are working the same hours.
“The Albanese Labor government is standing up for casual workers who want to become permanent employees,” he said in a statement on July 24.
“As part of the government’s next set of workplace reforms, we will close the loophole that leaves people stuck as casuals when they actually work permanent regular hours,” he added.
“That means they work just like permanent employees but don’t get any of the benefits of job security.”
Although the reforms have been welcomed by union leaders, small-business representatives have lambasted the move.
In an interview on ABC radio, the Australian Chamber of Commerce and Industry’s CEO Anthony McKellar said casual employment was ideal for many workers and businesses.
“There’s a bit of a false narrative going on. There’s an effort to demonise casual employment and the reality is for many people, it’s an ideal form of employment,” he said.
Mr. Mackellar also emphasised the fundamental importance of labour market flexibility for Australia’s small-business community and the wider economy.
“For many small businesses, of course, they need that flexibility with their workforce,” he said.
“It is of real concern to many small businesses, particularly retail stores, hospitality, restaurants, and cafes. For them, casual employment is the backbone of what they do.”
In contrast, the United States has access to a far less regulated and flexible labour market.
The U.S. federal minimum wage sits at US$7.25 per hour, appreciably lower than Australia’s $23.23 (US$15.41).
While there is an argument that such policies may contribute to the well-being of workers, it does allow small businesses to maintain higher margins during periods of high inflation. Thus, increasing their chances of succeeding in the longer term.
Further, there are only two employment classifications in the United States—part-time workers (those working under 35 hours per week), are entitled to very few employment benefits relative to part-time and casual workers in Australia.
