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Is the road to recession paved with $7 lettuce?

Journalist and Policy Fellow at the University of Sydney Sydney’s Policy Lab, Claire Connelly on why prices are rising and the risk that poses to the economy.
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Right now, our grocery bills are soaring, with some common vegetables more than doubling in price.

Part of the reason is that there’s a nation-wide shortage of leafy greens, but there’s also a bigger force at play: inflation.

Inflation is now at a higher level than anytime since 1990 and the cure for inflation could involve more economic pain for many of us.

Today, journalist and Policy Fellow at the University of Sydney Sydney’s Policy Lab, Claire Connelly on why prices are rising and the risk that poses to the economy.

 

Guest: Journalist and Policy Fellow at the University of Sydney Sydney’s Policy Lab, Claire Connelly.

 
Read Transcript

[Theme Music Starts]

RUBY:
From Schwartz Media, I’m Ruby Jones, This is 7am.

Right now, our grocery bills are soaring, with some common vegetables more than doubling in price.

Part of the reason is that there’s a nation-wide shortage of leafy greens, but there’s also a bigger force at play: inflation.

Inflation is at its highest level since 1990 and the cure for inflation could involve more economic pain for many of us.

Today, journalist and Policy Fellow at the University of Sydney Sydney’s Policy Lab, Claire Connelly, on why prices are rising and the risk that poses to the economy.

It’s Monday, June 20.

[Theme Music Ends] 

RUBY:
So Claire, everyone I think has noticed that prices are going up. Everyday items are more and more expensive. Things like lettuce, leeks, broccoli in particular seem to have become particularly expensive. So can you tell me about what it is that's going on?

CLAIRE:
Sure. So we know that prices are rising. That's called inflation. Inflation is an increase in the price of the goods and services that households by its measured as a percentage. And at the moment inflation is around 5%. Australian households are probably more familiar with living with a rate of around 2 to 3%. There are several contributing factors, but they all mostly boil down to poor planning and a complete lack of long term vision and preparation, both in terms of pandemic planning, COVID and climate change. 

Archival Tape -- Reporter:
“Today's inflation rate shows consumer prices surging to their highest level in more than 20 years, with the cost of living up 5.1% in the last 12 months.”

CLAIRE:
You know, we've been locked down for two and a half years almost and we've been operating in an environment of pretty high uncertainty. Things like supply chain issues, a war in Ukraine, as well as severe weather events like floods and fire. All of these things mean that Australians are not only paying more for petrol at the pump, there have also been significant increases in the price of consumer products, which I'm sure people have noticed, particularly when it comes to the cost of fruit and veg.

Archival Tape -- Reporter:
“New data shows grocery prices have soared by 4.3% at Woolworths in the March quarter and at Coles up 3.2%.”

CLAIRE:
When it comes to these things that we've been talking about, like fresh fruit and veg. Inflation is actually much higher than 5%. The price of cabbage, potatoes, broccoli in particular have increased by as much as 75% compared to just a couple of weeks ago. Iceberg lettuce, it's about $7 supermarkets. It even goes to as high as $11

Archival Tape -- Talkback radio man:
“133 882. We need to act as a team on this. I need to know what's going on with lettuce. What is the story with lettuce?” 

CLAIRE:
But to understand why prices are skyrocketing, you have to understand where food comes from and all the fascinating things that add up to the price of a single piece of edge. 

RUBY:
Right. Okay. So let's break that down then. Claire, what are all of the things that add up to the price of a leek or a head of lettuce?

CLAIRE:
So a lot of these vegetables are grown in the Lockyer Valley in Queensland which flooded recently. That's knocked out some supply and we've had unprecedented flooding, about a year's worth of rain in just a few months, which has meant that a huge amount of crops have had pretty low yields across Queensland and New South Wales. Then on top of that, for regular farmers, the costs of running a farm have increased. 

Despite the recent fuel excise. Petrol prices have returned to an all time high, so tractors and trucks are more expensive to run. Fertiliser prices are up. Packaging prices for some items are up by as much as 70%. Then you need to drive your produce to the market where it's then flown to various supermarkets around the country and aeroplane fuel has also increased. 

That's happening because right now we have a perfect storm of inflation. Many of these supply chain and petrol issues are largely due to the war in Ukraine, and a number of countries have now blocked gas from Russia. You can say we have these big global macroeconomic forces and you have local shortages and supply. But that's not quite accurate. 

It's not just that we have local supply problems, it's that much like oil and gas. Australia exports most of its fruit and veg. Australia exported around $263 million and 216 tonnes worth of Australian fresh vegetables to over 50 global markets last year. But because a lot of these crops were wiped out by the floods, farmers have less stuff to export. So what? Locally grown fruit and veg did make it to our shelves. Their prices have had to increase to make up for low yields and the export revenue that has been lost to climate change along with the higher running costs for farmers. 

So these factors combined are causing significant volatility in the prices of food. 

It's really important to highlight here that the inflation we're witnessing today is not just the convergence of these unpredictable macroeconomic factors that came out of nowhere, particularly on climate change, but on COVID as well. The inflation we're seeing now is the result of long-term inaction. 

RUBY:
Okay. Can we talk a bit more about the impact that all of this is having then, of this confluence of of climate change, a lack of planning to take that into account, these local events, these international forces all coming together. And, you know, the end result is prices of everyday goods are rising. But I wonder I mean, when you take a step back and look at all of this, where are we at? This is just the beginning of all of these forces pushing prices up. And how expensive do you think that things could get?

And as you said inflation is currently at five percent. But when you take a step back and look at all of this, where are we at, is this just the beginning of all of these forces pushing prices up. And how expensive do you think that things could get?

CLAIRE:
So inflation is currently at 5%. But RBA chair Philip Lowe says it could reach as high as 7% by the end of the year. That would be the highest interest rate we've seen since 1990 when it hit 7.3%. 

To try and counter that to reduce the rate of inflation The Reserve Bank has intervened. The Reserve Bank's main job is to keep inflation down and it really only has one mechanism to do that, which is to change interest rates, which it's now doing first by 25 basis points in May, then by 50 points in June, the largest hike we've had in 22 years. 

The problem with inflation is that once you're in it, there's very little you can do to bring that number down in the short term. So the best thing to do to prevent inflation is to not have created the conditions that allowed it to occur in the first place. But now that it's here, I think we need to be really careful in how we react to it. 

And that's why this isn't just about the size of our grocery bills. We're dealing with huge forces that are putting our economy in a really precarious position because the only real tools to control inflation, interest rates, well, they also slow the economy down. And they can make a recession more likely. 

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RUBY:
Claire, we’ve been talking about rising inflation, and the conditions that are causing it. The Reserve Bank is responding to the situation by using its only real lever - adjusting rates. So the idea, right, is to cool down spending by making it more expensive to take out loans? Is that what the Reserve Bank saying?

CLAIRE:
The chair of the Reserve Bank, Philip Lowe, says that interest rate hikes are necessary to prevent 7% inflation. 

Archival Tape -- Rob Lowe:
“The other consideration was that inflation is high. It's too high at the moment it's 5% and by the end of the year I expect inflation to get to 7%. That's a very high number and we need to be able to chart a course back to 2 to 3% inflation.” 

CLAIRE:
He says that it was required because there's too much spending pressure compared to the economy's capacity to produce goods and services. 

Archival Tape -- Rob Lowe:
“I'm confident that we can do that, but it's going to take time. And with inflation being as high as it is and with interest rates as low as they are, we thought it was important to take a decisive step to normalise monetary conditions.”

CLAIRE:
I'm quoting him here. He says, “When there's a lot of pressure on capacity, prices go up and high interest rates will establish a better balance between spending and the ability of the economy to produce goods and services.”

RUBY:
Okay. And so if the job of the Reserve Bank is really to control inflation, how do we get to this point then when inflation isn't under control? But the only real solution the RBA has is to to raise the cash rate, which might actually make things more difficult for people and make it. I mean, is the question here that we should be asking is did the RBA fail? 

CLAIRE:
Look, I don't know if it's as much as did the RBA fail as did the Government fail. 

I mean, Philip Lowe was begging Scott Morrison to intervene with what we call fiscal stimulus, which is basically, you know, having the government intervene in the economy by introducing policies that make the cost of living easier for, you know, your ordinary Australian 

I cannot overstate the impact  poor planning and insufficient fiscal stimulus has had on inflation. What we should have been doing this whole time for decades is taxing the wealthy. Taxing multinationals. Scrapping things like negative gearing. You know, if inflation is caused by people having too much money. There are a bunch of wealthy people you could call on. I mean, if you want to get the highest amount of revenue with the least amount of effort going after the big end of town seems like the most efficient use of time. I mean, it's right there in front of you

I think it kind of really goes back to what I said before, which is to prevent inflation, you really need to prevent the conditions that create inflation in the first place. So, I really think that the responsibility for a lot of the conditions that we're seeing comes down to inaction on the part of the government. I don't think we can blame them for all of it, but I certainly think that it was possible to significantly reduce the rate of inflation and potentially hold off the most severe impact.. 

RUBY:
Mmm. And when you look ahead, Claire, what do you see? Because it seems like things are probably going to get more difficult before they get easier. We're seeing inflation rates rise in a lot of other places and the Reserve Bank here is saying that that the rate will continue to go up before it goes down, right?

CLAIRE:
Umm, you know, what we might see is a big drop off in the consumption of other consumer items outside of fruit and veg. I mean, retail sales are already plummeting. 

But, you know, even if it did. Who cares if the price of food has dropped off? Less people are buying it. I mean, that's a pretty bloody big trade off. You might buy less petrol or go into the office less, which is fine, you know, if you have that luxury. But there are people who are going to have to choose between working and driving. And in the middle of one of the coldest winters on record, do you really think people are going to give up food, petrol or work because interest rates have increased? 

I mean, we're in a really precarious situation. And I've got to say, like in addition to locking out an entire generation out of a property market, that was already really difficult to get into in the first place, you're also making cost of living pressures even more precarious. 

Unfortunately, this is going to hit the most vulnerable, the hardest and those that have a buffer. You know, it won't be easy, but, you know, they'll have more capacity to ride it out than those that are living paycheque to paycheque. You know, I think, as I said, we're in a pretty precarious position.

RUBY:
Mm hmm. And I suppose the big fear is things will get worse to the extent that we might find ourselves in a recession.

CLAIRE:
Look, that is the fear. You know, the R word is kind of even saying it out loud seems to be tempting fate. And I don't I certainly don't want to be a doomsayer, but I do think it is a potential risk. 

RUBY:
Okay. And. I think the question that a lot of people are asking now is how likely is it that we're actually going to end up in a recession? And if we do, what does that actually mean? What does a recession look like for Australia? 

How big a risk? How likely is it that we are going to end up in a recession - and if we do, what does that actually mean? What would a recession look like for Australia? 

CLAIRE:
Yeah. 

Generally what a recession means is a decline in economic activity for two or more quarters. But what that means in practical terms is spending on goods and services would contract, businesses would go under. Jobs are lost, which in turn exacerbates that contraction by reducing spending even further. This can spiral out of control unless or until the government steps in. 

The timidity of past governments to take these tough decisions on areas like wealth inequality and climate change are at least partly to blame for the situation we now find ourselves in and charting a way out of inflation while avoiding recession and everything that comes with that. That's a really tricky path and requires us to take action on these issues that we've avoided for too long. 

Recessions have as much to do with the macroeconomic environment as it does with consumer confidence. The Labour Government now has, I think it's fair to say, considerable latitude to take these important decisions that need to be made. And even in the first, you know, four weeks of its term, it's already announced several tangible policy initiatives which have, for the most part, I think, been met with enthusiasm by voters and consumers. And hopefully, that optimism will help keep us out of recession.

RUBY:
Claire, thank you so much for your time. 

RUBY:
You're very welcome. Thanks for having me.

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RUBY:

Also in the news today,

The UK’s Home Secretary Priti Patel has approved the extradition of Julian Assange to the United States, where he faces charges that could lead to 175 years in prison.

The charges, under the espionage act, relate to the publication of secret US diplomatic cables. Over the weekend Prime Minister Anthony ALbanese said : “he has paid a big price for the publication of that information already. And I do not see what purpose is served by the ongoing pursuit of Mr Assange.”

And..

Some NSW Homebuyers will be eligible for a new shared equity scheme.

The NSW government says it will help 3000 frontline workers such as nurses, police and teachers, as well as singles aged over 50 and single parents into the housing market by paying for 30-40 per cent of the price of the home.

I’m Ruby Jones, this is 7am, see you tomorrow.

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