The Bed is Made

Pulling back the sheets

There’s the moment, many of us are only too familiar with, when we realise the three-and-a-half-star hotel that we decided to settle for wasn’t celestial enough. The sheets had known whiter days, the mattress sags in the middle, and yet, having paid the tariff and turned the key, the only thing left to do is lie there and make the mental note to never return. Australia’s post-COVID macro-position has been sold out for the three-star hotel. The Rubicon of capitalism into unchecked Keynesianism was crossed – cheques were written, the rates were slashed, and the regulatory dams were burst open. Now, long after the free money has stopped raining down, Australia wakes to find itself wedged between two uncompromising rocks: a long‑overdue market correction on the left and the impeding reality of runaway inflation on the right. The bed is made, the night is late, and now there’s no other inn with a vacancy.

When the pandemic arrived, Canberra reached instinctively for the fiscal fire‑hose. Between March 2020 and June 2021, the Commonwealth underwrote roughly 19 per cent of annual GDP through JobKeeper, expanded JobSeeker, cash‑flow boosts, early super withdrawals and sundry parachutes. Monetary policy marched in lockstep: the Reserve Bank of Australia (RBA) chopped the cash rate to 0.10 per cent, bought $281 billion of Commonwealth and state bonds, and stamped a three‑year yield curve “guarantee” at 0.25 per cent. These efforts cut, slashed and burned what was left of the “real economy” and plunged us evermore into the realm of government-supported economic activity. The vitrified credit markets thawed, and aggregate demand sprinted ahead of lockdown‑crippled supply. The bed was made for inflation and runaway deficits. Supply side was decimated with forced closures depending on arbitrarily defined “essential” and “non-essential” activities, and demand with the deluge of free cash into consumers hands, shot through the roof.

The result was not merely “stronger growth”; it was a surge in the general price level that would, by late 2022, inspire Governor Philip Lowe to admit Australia was navigating a “narrow path” between re‑inflation and recession.

Why has the rope narrowed? First, because households were induced to shift portfolios from risk‑free deposits to risk‑seeking assets. Second, because the world did not stand still: fossil‑fuel supply curbs, war‑premium freight rates, and a synchronised bounce in services demand all collided with the RBA’s late start to tightening. By the time the Board lifted the cash rate off the floor in May 2022, underlying inflation was already at 6.9 per cent year‑on‑year, nearly triple the 2–3 per cent target midpoint. Leaning further into hawkish territory now risks crystallising the very correction policymakers dread: a cascade of mortgage distress, property‑price capitulation, and labour‑market slack. Move too slowly, however, and second‑round price rises could ossify into expectations. Thus the rope does not just narrow; it frays.

The “cost‑of‑living crisis” BS

Public discourse now fixates on a “cost‑of‑living crisis,” as though the problem were some exotic new beast prowling supermarket aisles fuelled by “capitalist greed”, which up until now was retrained for no better explanation than “corporate altruism”. This crisis is, in truth, plain old inflation. Retail electricity tariffs rose 13 per cent in nominal terms last financial year; milk was up 10 per cent; rent indexes climbed 7 per cent despite advertised vacancies below 1 per cent. None of these signals an unforeseeable meteorite strike. It is the textbook outcome of excess nominal spending outpacing anaemic real production. All problems created in Canberra, not corporate boardrooms.

Yet a second illusion blooms: that the Consumer Price Index (CPI) is a comprehensive yardstick for “the prices that matter.” Even the Australian Bureau of Statistics (ABS) concedes the index feeds off a representative basket that must be “re‑weighted annually to remain contemporary.” Australian Bureau of Statistics. Each re‑weight is an opportunity—legitimate in theory, controversial in practice—to tilt emphasis away from items rising fastest (say, fresh food) toward items rising slowly (digital devices, out‑of‑pocket healthcare after Medicare rebates). In effect, authorities smooth the very jaggedness that you and I feel so acutely.

The ABS is not alone. Around the world, statistical agencies deploy two broad techniques to make inflation read more favourably:

1. Substitution and chain‑weighting. When beef jumps, but chicken lags, consumers “substitute” and the index downgrades beef’s weight. Good economics? A stretch. Convenient numerics? Certainly.

2. Hedonic quality adjustment. If a 2025 laptop is twice as fast as its 2021 ancestor, a price increase of 30 per cent can be massaged into a quality‑adjusted price decline. The U.S. Bureau of Labor Statistics describes hedonic regression as “removing any price differential attributed to a change in quality.” Bureau of Labor Statistics Critics retort that such alchemy definatly understates what consumers actually pay at the register. Economics Help

Internationally, the most notorious case belongs to Argentina, where from 2007–2015 the Kirchner administration manipulated official CPI so flagrantly that the IMF issued a censure.

Fortunately, today, we don’t have to rely on the omnipotence, integrity and benevolence of the ABS. Citizen‑level data collected by the MIT Billion Prices Project (BPP) blew the whistle. Digital price‑scrapers (similar to those used by organisations I’ve worked for) now harvest millions of online quotes daily. The BPP aggregates these into shadow indices for dozens of economies, often diverging markedly from official ABS numbers. For Australia, the BPP’s series showed headline inflation running 0.8–1.4 percentage points above the ABS CPI through mid‑2023! driven by food staples and household durables that the ABS basket either under‑weighted or hedonic‑adjusted. The Billion Prices Project. That difference may sound small, but compound it over five years and the real purchasing‑power erosion is huge: $100 in 2020 buys only $72 of the same grocery bundle today, while the CPI implies $77.

Macro decisions made under crisis conditions tend to lock in future constraints. By guaranteeing near‑zero rates for three years, the RBA encouraged a $1 trillion surge in variable‑rate mortgages. When inflation resurfaced, that stock of debt became the transmission belt for pain: each 25 bp hike now drains about $3.2 billion from household cash‑flow annually. The Board cannot simply reverse course without causing price growth, yet pressing ahead risks triggering delinquency spikes and forced selling.

From nominal mirage to real correction

A genuine correction would entail:

• Positive real interest rates for at least two years;

• Balance‑sheet shrinkage at the RBA to steepen the curve and restore term premia;

• Structural deregulation to raise productivity rather than stoke consumption;

• Targeted fiscal repair—ending zombie subsidies and indexing tax thresholds to real price indices, not the “groomed” CPI.

The political appetite for such medicine is vanishingly small. Canberra prefers handouts: energy rebates, fee‑free TAFE, mortgage “holidays.” Each new concession, however, is monetised by banks and retailers within months, feeding back into prices. The snake swallows its tail.

Monetary history teaches that once inflation expectations settle above target, only a recession of some magnitude tends to break them. The bed is made. And we’re going to have to sleep in it.

Our bed:

1. Inflation figures, to the average Australian, are as opaque as a baby bath after an episode of explosive diarrhoea and about as useful.
2. Inflation is not CPI. CPI changes are the consequence of inflation, not the cause, and certainly not the result of company’s suddenly increasing in greed. They’re always greedy. They’re there to make money.
3. As a result, over the past 40 years, compounding CPI is completely divorced from Money supply growth.
4. We’re not in a “cost of living crisis”, we’re on a inflation vs recession tight rope while the real economy becomes less and less sophisticated https://atlas.hks.harvard.edu/countries/36 .
5. Poor economic literacy has enabled government policy to ebb the private sector at the cost of national economic resilience.

Policy, like hospitality, involves the art of promise‑making. In 2020 Australia promised safety, solvency, and swift recovery. It delivered on the first, fudged the second, and over‑delivered on the third—over‑delivered so zealously that prices galloped beyond wages and the ledger now demands settlement. Governments may continue to massage the CPI—re‑weighting here, hedonic trimming there—to make the sheets look crisp. The public, meanwhile, counts the real cost every time they tap.

There will be pleas for yet more cushioning: rent caps, grocery‑price inquiries, deferrals on student‑loan indexation. All may soothe symptoms, but none alter the underlying arithmetic. Australia stands where every over‑stimulated economy eventually stands—at the foot of its own lined bed, blinking in the dawn light, wondering how the night’s revelry could have been so dear.

And so, here we are, sorry about the mess.