It’s easy to get caught up in the day-to-day headlines about prices going up, but understanding inflation, especially in a country like Australia, is a bit like looking at a long, winding road. Back in the early 1970s, Australia found itself on a stretch of that road where inflation was noticeably higher than in many other developed nations. This wasn't just a fleeting moment; it became a persistent feature for quite some time.
When economists and policymakers looked at what was driving this, they found a few key players. Interestingly, the growth in nominal wages seemed to be the real heavyweight, more so than the growth of money supply, in pushing prices higher. This is a crucial point, especially for a country like Australia where wage negotiations and their outcomes have historically played a significant role in economic policy discussions. The idea was that controlling wage inflation was a direct lever for controlling price inflation.
But it wasn't just about wages. The research from the Reserve Bank of Australia back in 1991 highlighted something called 'inflation inertia.' Think of it like a heavy train – once it's moving, it takes a lot of effort and time to slow it down or change its direction. This inertia meant that even if policies were put in place to curb inflation, the effects wouldn't be felt immediately. It would take a considerable period for the economy to respond.
For comparative context, the paper looked at Australia's major trading partners: Japan, the United States, the United Kingdom, and New Zealand. During the period studied (1973-1989), Australia's average annual inflation rate, measured by the CPI, was around 9.7 percent. For comparison, the OECD average was about 7.7 percent. When looking at GDP deflators, the figures were 10.0 percent for Australia and 6.6 percent for the OECD average. So, yes, Australia was indeed experiencing higher inflation rates during that era.
What does this mean for policy? Well, it suggests that any strategy to bring down inflation needs to be sustained and patient. And crucially, if wages are a primary driver, then any successful policy must address aggregate nominal wage growth directly. The shift towards a more deregulated wages system in Australia, while offering potential benefits like increased flexibility, also means policymakers might lose some direct control over wage outcomes. This underscores the complexity of managing inflation – it’s a balancing act involving wages, money, productivity, and even global economic trends.