''There is more to determining inflationary outcomes than the...

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pintohoo

87,900 Posts.

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21/07/24

21:20

Post #: 74848833
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Originally posted by madamswer ↑

"Not sure that one stands up. For 8 of their 9 years in office the Coalition ran deficits with low inflation. It was only in their final year that they ran a deficit that correlated with high inflation which has been generally attributed to supply chain issues. The ALP government has run significant surpluses in both budgets but experienced persistent inflation. So, over the last 11 years in this country high inflation has coincided more with surpluses than deficits."

Wrong take.

There is more to determining inflationary outcomes than the actions of government alone.

Inflation an outworking of the ability for an economy to satisfy aggregate demand.
And aggregate demand is a function of the activity of not just governments, but households and businesses.

If private sector demand is muted, then even if government expenditure is aggressive (i.e., in deficit to budget) inflation is not a given. Conversely, inflation could rise if the private sector demand is sufficient to more than offset modest level of government spending (i.e., during surplus budgets).

What we have now is government spending crowding out the private sector within an economy bumping up against full capacity. If households and businesses stepped up their contributions to aggregate demand, inflation would remain high even if the government spending eased significantly.

But that ain't going to happen, which is why monetary policy settings are what they are today, i.e., sufficiently elevated to compel private sector demand to remain docile.

What's required is a supply side response, but the lead times for that to take effect are measure in years, not mere months or weeks.

Unfortunately there is not a single supply-side economist occupying the halls of Canberra.
So, for the foreseeable future we are going to see sluggish economic growth in tandem with sticky inflation.

In the lexicon of the practitioners of the dismal science: Stagflation.

It's a nasty beast because it erodes living standards.

Gonna be a gnarly few years ahead for Australians (following on the past two gnarly years of low growth + high inflation.)

.

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''There is more to determining inflationary outcomes than the actions of government alone.''

pretty straight forward statement - and one which I agree with

which clearly says that you disagree with the OP
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