Peter Martin highlights an excellent column by Barry Hughes, but the part of the column I’d stress is not the idea that the RBA shouldn’t be slowing the economy (and as a result increasing unemployment). As Hughes says, this is appropriate to prevent the current increase in price rises in our economy entrenching itself into inflation.
But as Barry says- referring to Glenn Stevens’ comments:
On this short-term response he cannot be faulted, but what comes after the emergency is controversial. Hitherto, bureaucrats have fudged their unease over recently falling unemployment with a tautology that Australia was coming closer to capacity (the production equivalent of the natural rate). Now, they have been emboldened by rising inflation to break cover.
In addition to Stevens’s judgment of a “pretty fully employed” economy, Treasury said at budget time that future growth would have to be dependent on new productive capacity “rather than any [my emphasis] further soaking up of spare capacity”. In other words, Australia has reached its unemployment limits.
These thoughts have been lurking in the background for some years. For example, for more than three years since February 2005 (when unemployment exceeded 5 per cent) the bank has warned about a need to keep spending growth within the limits of potential gains in output. Economists recognise this as code for no further falls in unemployment.
But is higher inflation a one-off from external food and oil shocks or is it a consequence of an overheated economy? As Stevens admits, wages still show no general symptoms of overheating, while the issue of the whereabouts of full employment remains unsettled in the research literature.