Inflation is a terrible thing. It impacts people and businesses differently in ways difficult to control and manage. It robs people of their savings, particularly those on the wrong side of 60 years who are holding their savings in banks or in other fixed-income forms. It increases the cost of living for those who can least afford it. It is pernicious. An inflation rate of just 5% per annum increases prices by 50 percent in only 8 years or so. No wonder those grocery prices seem high these days and it has nothing at all to do with supermarkets supposedly profiteering. Nothing. That’s simply a distraction perpetrated by duplicitous government.

Inflation is and has always been because of the profligacy of kings, princes, despots and governments. Inflation is another word for the debasement of the currency brought about those in charge creating more of it to fund what can’t be afforded. 

Currently Albanese and Chalmers have told us through their latest budget that they intend to run large deficits from this year on. If they paid for them by issuing bonds interest rates would rise. So they won’t. At least in large part they won’t. They’ll “print” money.  That’s the bad news for coming years. However, for the time being, there is good news that inflation is on the way down, if only because of the hard medicine applied by the Reserve Bank.

Monthly inflation numbers came out last week. Inflation in the twelve months to end 30 April reportedly crept up to 3.6 percent from 3.5 percent in March. In other words, despite the headlines –  e.g., “inflation climbs again”  – nothing changed.  The methods for measuring inflation are not that good that some small tenths of a percentage point difference from one month to another are meaningful. 

Incidentally, underlying inflation was reported by the ABS as being steady at 4.1 percent. So there you go. Nothing discernible changed, including the media’s appetite to hype the numbers. In any event, looking at current price changes is no way to measure whether inflation is on the way down or on the way up. There is too much noise in the numbers.

Inflation as Milton Freidman explained is a monetary phenomenon. Rather than look at consumer prices we should look at the money supply – a particularly at M1 money (cash plus at-call deposits in banks and other deposit-taking institutions) because that is the form of money immediately available to spend.

The money supply in the form of M1 increased by a whopping 89 percent between March 31, 2019 and March 31, 2022. The Covid effect. Namely, the grotesque response to a relatively mild disease for those not old and ill or obese.

It is shall we say unsurprising that such excessive monetary growth led to inflation. And the overhang of the increase in the money supply has still a way to go to work itself out. However, between March 31, 2022 and March 31, 2024, M1 money actual fell slightly. So the tightening of monetary policy is working. And, there seems no reason to think more need be done. The current level of interest rates seems consistent with bringing the growth in the money supply down and thus, after a time, inflation too.

Unless the money supply starts growing strongly again, or falls of a cliff, it’s probably best that the Reserve Bank simply sticks with rates at their current level. And it might help if it said so to avoid the uncertainty created by the intense attention paid to every nuance of Reserve Bank board minutes and to every noisy statistic on prevailing price movements.

The real problem isn’t in the here and now, it’s what it has always been, the inability of governments to live within their means allied with their unerring ability to spend wastefully.  Get good government. Get price stability. There’s a rare trick to pull off.