Budget measures

We’ve been of the view that inflation would return to target, and have been surprised by how long it has taken.

That said, something that we didn’t expect to keep seeing, is state based government offsets. The below “cost of living” excerpt from the WA budget is exactly why interest rates have remained “higher for longer” than was previously expected.

It is madness. Inflation from excess demand falling heavily on some households (but obviously not all) would eventually (like a fire burning itself out) end as households cut back on spending, on the assumption there is a fixed supply of money, and that somewhere (off camera) a central bank is raising the real interest rate to restrain consumption and investment and to encourage saving. Alongside declining real wages, this will do the job.

The cost of living subsidies are offsetting that process. What’s frustrating is that it is quite basic economics, none of the above is remotely controversial in economics.

You see it in housing. “House prices are high, therefore we must give money to first home buyers so they can buy a house”.

This is why we can’t have nice things.

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