So inflation is at a 35-year low. Treasurer Peter Costello, while outwardly pleased, cannot take to much pleasure from the figure yet. True, inflation can only be kept under control by governments willing to be frugal with the money supply and in their own spending. Vote-buying by governments has particularly pernicious effects on inflation. But that is not the whole story.
Inflation is low now because demand is so low that businesses dare not put their prices up. And demand is low because of insecurity in the workforce. With so much restructuring and downsizing people wonder if they will be next. A further cause of the low inflation figure is that declining interest rates have resulted in lower home-mortgage repayments and these payments comprise a significant part of the consumer price index.
So low inflation cannot be put down to the genius of government economic management. None the less, the government deserves some credit for getting its fiscal house in order. It is now important for Australia to take advantage of the low-inflation, low-interest environment. Tax reform and further industrial-relations reform are needed to give confidence to investors and employers and changes to the welfare system to encourage work and education are also needed.