Australia's rising cost of living and possible solutions

Cost of living in Australia is very high, and over the past few years, it seems evident that the “factual CPI” has far outpaced the growth in average incomes. I have not taken the time to thoroughly review the economic data, so this is merely a commonsense judgment based on personal experience. If my common sense is correct, I believe we should adopt more proactive measures to control further steep rise of CPI.

Australia’s current approach to controlling cost of living primarily focuses on managing the aggregate demand, with traditional monetary policies like interest rate adjustments as the main policy option. I believe this is too crude and highly outdated. Its philosophy lies in the principles of laissez-faire capitalism, assuming that as aggregate demand decreases (by raising interest rates), CPI will naturally decline.

While this makes sense to some extent—since reduced spending eases price pressures—it also brings problems. First, the impact varies significantly across different income groups: poorer families are more sensitive to the income reduction caused by rising interest rates (e.g., due to the increased mortgage interest rates), resulting in disproportionately higher pain from cutting expenditures, compared to wealthier families who are less affected.

Second, raising interest rates further exacerbates costs on the supply (or production) side. If the CPI rise is cost-driven in nature, then higher interest rates not only fail to resolve the issue but also worsen the situation. Therefore, this doesn’t necessarily address the root causes of rising living cost.

Then a better and more systematic approach, in my opinion:

First, on the demand side, beyond the current macro-level aggregate demand (primarily by looking at indicators like M2), indicators to present "distribution of M2" need to be added. For the same size of M2, if the distribution differs, the transmission to inflation will be very different. For example, what proportion of the money is held by wealthy families with abundant liquid assets versus the poor? It can be cut into tiers to watch. The more money is held in a small group, the greater the pain for the general public. We are no longer in the era when Keynes was managing the economy; we have long entered a fully digitalized stage, enabled by technology to implement a more “fine-grained” and timely monitoring of “monetary ownership structure”.

Second, while the supply side also needs to get monitored in a lower level of granularity, the approach can differ. For the basket of goods and services picked to form CPI, the "probes" should reach into major corporations. For example, targeting upstream grocery items like grains and vegetables, which have a significant impact on costs, the key observations will include: Which corporations are the most representative? What is the potential capacity and the actual production; and why the potential is not reached? Are the profit margins regular? Are the costs of management excessively high? What is the level of productivity? Among these, capacity and production are short-term factors, while cost structure and productivity are long-term factors. This then allows us to have a deeper understanding of underlying causes of price forming.

Once the above “Dashboards” are established, if intervention is truly necessary on the supply side, in the best case, it would require the establishment of an independent government agency with authority to jump in and intervene. This may seem contrary to the principles of a free market. However, since Australia already has a high level of government spending, why not consider a more effective approach spending the budget? As a reference, for example, China has a dedicated department for cost of living management called the "National Development and Reform Commission" and has succefully operated for decades.

The short-term factors mentioned above would be relatively easy to monitor and intervene. However, the long-term factors (industry level productivity and cost structure), on the other hand, would require in-depth scanning and analysis and getting published to the public periodically (e.g., annually) and proposing long-term solutions for government evaluation and approval. For example, if significant flaws are found in productivity, it might suggest it is wise to invest in infrastructure to reduce logistics costs or introducing certain key technologies to address issues so heavy-weight or complicated that a single enterprise cannot possibly resolve. The possibilities are numerous. The benefit of driving large-scale government investment in this way is that the investment would have managing cost of living as its fundamental goal, rather than being investment for the sake of investment. The latter can easily be challenged and refuted while the budget is getting reviewed, whereas the former is a purely quantifiable topic to evaluate the ROI.

The above is a preliminary analysis and solution framework. Further investigation and reviewing is of course still needed, to solidify (or revise, if necessary) the points made above.