min read
· Posted on
February 21, 2024

Are interest rates the only way to tackle inflation? Part 3: delayed spending

Confused about why inflation is STILL high even with all these cash rate hikes? We'll talk through why and delayed spending as another possible solution.

What's the key learning?

  • Part one recap: monetary policy and what's contributing to supply-side shocks to inflation
  • Part two recap: fiscal policy
  • Compulsory super contributions as a tool to manage inflation

Note: This article is part three of a three-part series answering the question, ‘Are interest rates the only way to tackle inflation?’ If you haven’t yet read part one of this article series on monetary policy, or part two on fiscal policy, check those out first!

In part one of the ‘Are interest rates the only way to tackle inflation?’ series we looked at monetary policy (aka hiking interest rates to tackle inflation) and how it reduces demand for goods and services to bring down inflation. 

In part two, we looked at fiscal policy as a way to tackle inflation. 

The gist of part one and part two: 

Both monetary and fiscal policy tighten the pockets of everyday people to discourage spending. 

The idea is to decrease demand, which should hopefully put downward pressure on prices and bring down inflation.

Buttt, these policies aren’t necessarily enough to tackle inflation on their own, especially when over half of inflation is caused by supply shocks like changes in oil prices due to the Russia-Ukraine war and post-pandemic supply-chain disruptions. 

And one of the biggest disadvantages of these policies is that they restrict people’s spending ability, and can significantly impact their quality of life.

In particular, with current cash rate rises, mortgage holders are being hit hard with the interest rates on their mortgages.

But, what if instead of taking away people’s ability to spend, it was possible to simply delay when they get to spend…like, when economic conditions stabilise.

Delaying spending to curb demand:

20 years ago, an Aussie economist, Nicholas Gruen came up with an interesting idea of using compulsory super contributions in the short-term to stabilise the economy in tough times. 

The idea is that when the economy is struggling, you increase the amount of money people are required to contribute to their super.

That way, instead of increasing interest rates (where the banks benefit), Australians are instead forced to pay themselves…only in the future.

Thinking along the same lines, in 2020 another economist Lauchlan Kerwood-McCall thought it might be pretty cool if an adjustable compulsory saving mechanism could be used as a tool to manage inflation. 

With this, the RBA would have the authority to make us save a portion of our weekly income into superannuation to reduce our spending at a time when inflation needs to be controlled.

And while this system also impacts demand-side inflation, it might be a fairer alternative to monetary policy which is rough on mortgage holders and great for banks - who continue to grow their net interest margin.

A system of delayed spending might ease the pressure on the pockets of Australians during tough times.

The closest policy to this right now is the superannuation guarantee. However, this isn’t able to be adjusted during times of high inflation. But given the tight economic conditions we have ahead of us, maybe thinking differently is just what we need.

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