Over the 12 months to the June 2021 quarter, the official Australian Bureau of Statistics (ABS) inflation metric, the consumer price index (CPI), rose 3.8 percent year-on-year. This news comes as Bitcoin, which is argued to be a hedge against inflation, has bounced back from its 2021 lows.
Should We Be Worried?
The latest ABS CPI figures are materially higher than the 12 months to the March 2021 quarter, which measured 1.1 percent.
“Not to worry”, according to John Hawkins, senior lecturer in Politics, Economics and Society at the University of Canberra. He argues that the jump is only temporary as a result of several one-offs.
As the Reserve Bank told us back in May, a main cause is that in the depths of Covid lockdowns last year, the government heavily subsidised childcare, pushing the effective price to near zero. With removal of those subsidies the price has bounced back. This is a one-off – it can’t be repeated.
John Hawkins, School of Politics, Economics and Society, University of Canberra
Reasons Not To Worry
Hawkins cites a number of reasons not to be concerned:
- Petrol prices collapsed as cities locked down last year, and have since returned to pre-Covid levels – a one-off that won’t be repeated.
- Big jumps in the prices of some fruit and some vegetables due to a shortage of pickers and heavy rainfall are also viewed as one-offs.
- The “trimmed mean” measure of so-called underlying inflation used by the Reserve Bank of Australia (RBA) to see through transient influences was only 1.6 percent and is “a better guide to what is going on”.
The RBA has echoed the sentiments of other countries that the increase in inflation is likely temporary, and it expects inflation to be below 2 percent by the end of the year, reducing to 1.5 percent by 2022. In addition, most economists and traders forecast inflation to average around 2 percent.
Too Much Money Printing?
Hawkins downplayed concerns of “too much money printing” and criticised cryptocurrencies for pushing the narrative in the form of memes such as “Money printer go brrr”.
Further, he argued that the same was said after the 2008 crisis, yet nothing happened.
Hawkins doesn’t mention that the scale of the latest quantitative easing (QE) programs around the globe dwarf those of 2008. In addition, most developed countries around the world have reached record levels of debt-to-GDP as central bank balance sheets have piled the debt on over the past 18 months. And when you have unprecedented levels of debt, there are only a few ways out:
Default is rarely a possibility, so currency debasement in the form of increased money supply and consequent inflation is typically the route chosen to reduce national debt.
Bitcoin Bounces Back
While Hawkins recommends inflation-adjusted bonds as an inflation hedge, those in the crypto community would say Bitcoin:
After a lacklustre quarter, Bitcoin has bounced back over the past week, up close to 20 percent over the month.
Most in developed nations have no experience of hyper-inflation, unlike those in developing nations. In countries such as Argentina, for example, the case for Bitcoin is self-evident for large swathes of the population.
The US just recorded its highest inflation levels in 13 years, but the Federal Reserve, much like Hawkins, maintains that it is “transitory”. Time will tell if this is indeed the case.
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