As Reserve Bank board members gather for the second day of meetings this morning, they already would have been peppered with dire warnings about the potential impact of the energy shock, our chief business correspondent Ian Verrender writes.
But the situation today is very different to previous oil shocks, some 50 years ago now.
“Back in the 1970s, when the oil shocks sent seismic waves through the global economy, Australian workers held the whip hand during pay negotiations and there was industrial turmoil.
“Strikes were rampant and businesses had little option but to cave when it came to pay demands.
“That’s no longer the case.
“During the first oil shock, inflation spiked at about 17 per cent and wages ran riot, shooting 27 per cent. During the second shock, the Iran Revolution, inflation touched 12 per cent as wages surged 24 per cent.
“Compare that to the most recent oil price shock in 2022 when Russia invaded Ukraine.
“During the Ukraine invasion, wage growth peaked at 4.3 per cent and never caught up with inflation, in stark contrast to the situation in the 1970s when wage growth far outstripped inflation.
“Until 2024, workers suffered a huge erosion in living standards as our modern industrial relations system steamrolled the wages price spiral into a flatbread.
“Still, economists cling to the anchor and the expectations theory.
“Raising interest rates today won’t solve the energy crisis and it won’t push oil prices lower.
“It will merely add to the pain inflicted on households by removing even more cash from their budgets.
“It’s really the only weapon in the RBA arsenal, so it doesn’t have a great deal of choice.
“Rate hikes are good at curbing runaway demand. But that’s not the problem here. Instead, the RBA will attempt to grind economic growth down to match up with constrained supply.”