This leads to the very difficult problem of deciding what inflation really is and where it comes from. Part of the process is deciding how to measure inflation and what does money really represent anyhow?
The problem with the tradition definition of inflation (and the method of measurement) is that it leads to nonsensical results like "a storm caused the price of bananas to go up, thus leading to inflation". It should be obvious that the whole idea of the economic system is to account for external events and adapt to them. Thus, it doesn't make sense for a storm to cause inflation. Similarly, people say that the drought has caused the price of meat to increase (although many farmers will give you the opposite story) so we are led to conclude that a drought caused inflation as well.
None of this is real... OK, the drought was real, and the storm was real but their ability to effect inflation seems decidedly strange. I believe that we need a different method of measuring inflation.
Based on this foundation, it should be possible to ask how much influence money can buy? Let us add a reasonable presumption here -- a poor man cannot successfully bribe a rich man, because nothing the poor man has to offer, worthy of consideration by the rich man. Thus, money is most useful when you have more of it than someone else. Based on the idea of supply and demand, the amount of influence my money can affect is closely related to my relative financial position with respect to other people who I might wish to influence.
At last, we come to a new measure of money -- take the "broad money" figures as published by the Reserve Bank and divide by the population of the country as published by the Bureau of Statistics. To make things easier, I've prepared a graph of the past 30 years looking at "Broad Money per Head of Population". Naturally, the financial axis must be a log-scale because we want all constant interest-rate curves to be displayed as straight lines. The time axis is linear and the year marker falls on the December/January boundary (note that statistics are often collected for whole months rather than at instantaneous points in time, so the time axis might be subject to minor shifts).
The excellent thing about this graph is that it contains nice, mostly-linear, long-term features. Each segment has been fitted (red lines) to a perfect exponential increase with an associated P/A inflation rate (red figures). Unfortunately, recent figures are missing because although the ABS provides historic population estimates and a current "population clock" value, short-term historic figures seem difficult to obtain. The Reserve Bank is much less "ad-hoc" with it's publication of on-line data.
Regardless of that (forget about the most recent year) there is still useful historic data available. Note that the early Hawke years were characterized by high inflation, then it was dramatically brought under control and finally settled down to an increase of 6.5% which was a trend continued by John Howard up until approx 2003. After this, there was a hiccup (possibly a delayed result of the GST) and the rate increased to 7.8% where it has been ever since.
Another way to look at this is to consider that the current average value of available money is $40k per Australian. This doesn't necessarily mean $40k of cash in you pocket, because this is "broad money" which includes loans, debts, accounts, etc. The point is that (on average), each Australian has $40k of money working for them in some way. In many cases it is as a home-loan... the typical home loan might be around $300k for a family of four so that averages to $60k each (not far off the graph). Many of you will have less than $40k of available money (in some form or another, not necessarily immediately available to spend) then you are below average and thus probably more susceptible to be influenced by someone wanting to hire you or buy something from you. On the other hand, those above $40k are more likely to be the ones doing the hiring or buying. We could visualise this as some sort of rough, national "pecking order" and the average value of available money provides a relative measure to guesstimate your position in the "pecking order".
What we can say for sure is that the high inflation of the 1980's was well and truly under control before John Howard took the driver's seat and indeed, since then, all he has done is continue the trend that existed before he took power. It is kind of annoying to hear that John Howard sells himself as the "I fixed inflation" Prime Minister when really, he made minimal changes to what was handed to him by Paul Keating.
On the other hand, what Howard has managed to do is make a lot more people put themselves further into debt to buy higher priced houses. Thus, making any rise in interest rates much more painful than it was under Hawke.
Broadly speaking, wage earners in both richer and poorer suburbs appear to have shared in the rising tide of prosperity. Although they did increase in real terms, incomes at the bottom of the income spectrum rose somewhat more slowly than for the middle between the mid 1990s and 2002-03, resulting in higher poverty rates and rising income inequality.
Can anyone explain to the people facing "higher poverty rates" how exactly they are seeing income "increase in real terms"? It's an oxymoron.
Someone who was once out of poverty and now has descended into poverty has most certainly seen a decrease in real terms. Ipso facto, any terms that suggest an increase we must conclude are not real. There must surely be some sort of intellectual shock in not only seeing such a self contradictory statement, but also in seeing it published bald-faced without so much as an eyeblink of embarrassment. Only in economics can such a thing be possible.
Just take tariffs. Bob Hawke and I wiped the tariff wall out. That means the doors are open to Australia so this wave of deflation from China, lower prices for everything, consumer goods, whitegoods, durables, computers, you name it, motor vehicles. So that means you've got that low inflation sweeping into Australia, cause there's nothing now to stop it. In the old days when you had the tariff the old goods had to jump the tariff wall and they would mostly go up 50 per cent or double in price.Now the higher wages which are in the inefficient sector of Australia like infrastructure, transport et cetera, these are being subsidised. That inflation rate which is running at about 4 per cent is being subsidised by zero per cent coming across the warves. If you've got half the economy doing four and half doing zero, the inflation rate is two. That's where Mr Costello gets his 2 per cent from, nothing clever from him.
So Paul Keating measures the Australian economy itself as a 4 percent inflation and the imports from China compensating at zero percent. That's an interesting way of looking at things and it does give a different perspective on the "basket of goods" measurement. Probably we should be tracing those goods back to their point of origin and assigning inflation along the path. That at least would make it clear where the inflation is coming from.
In a nutshell, Keating's argument is that Australia's productivity has been slipping back because the people doing the work are not getting a share in the profits that they create. As a consequence, they have no incentive to improve those profits because they know the improvement means nothing to their life. It's interesting that the central-planned economy of Soviet Russia stumbled into exactly the same lack of productivity. The old proverb was:
If they think they are paying us, then by all means let them think we are working.
The irony is that Australia under the Liberal Party is supposed to be the complete opposite, but yet we are heading back to a central-planned economy in the form of large corporations (who see workers as nothing more than human resources -- interchangeable and disposable) operating in lockstep with large government. Different rhetoric on an identical methodology, ultimately leading to identical failings.
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