smh.com.au
Australia's Inflation Surge: A Self-Fulfilling Prophecy
Australia's inflation rate reached 7.8 percent in late 2022, driven by pandemic-related supply disruptions, massive government stimulus, and a self-fulfilling prophecy among businesses who used media coverage to justify significant price increases, even after supply issues resolved.
- What were the primary causes of Australia's sharp increase in inflation in late 2021 and 2022?
- Australia experienced a significant inflation surge, peaking at 7.8 percent by the end of 2022, following nearly 30 years of low inflation. This surge was primarily driven by pandemic-related supply chain disruptions and the substantial monetary and fiscal stimulus implemented during lockdowns.
- How did psychological factors and herd behavior among businesses contribute to the inflation surge?
- The initial explanation attributes the inflation surge to government actions—lower interest rates and increased spending—leading to excess demand exceeding supply. However, an alternative perspective emphasizes the role of psychological factors and self-fulfilling prophecies.
- What are the long-term implications of this self-fulfilling prophecy dynamic on price setting and economic policy?
- Businesses, initially hesitant to raise prices due to a prolonged period of low inflation, used the pandemic and geopolitical events as justification for significant price increases. This behavior, amplified by media coverage and industry signaling, created a self-fulfilling prophecy, resulting in sustained inflation even after supply disruptions eased.
Cognitive Concepts
Framing Bias
The framing consistently favors the author's perspective. Headlines and subheadings (not explicitly provided in the text but inferred) would likely highlight the 'psychological factors' theory. The author's repeated use of phrases like "I've long suspected", "my model", and "let me show you my model" emphasizes their viewpoint and potentially undermines the credibility of other explanations. This narrative structure may lead readers to accept the author's theory as more valid than other existing ones.
Language Bias
The author uses loaded language to support their argument. For example, describing the conventional model as 'orthodox, mainstream' carries a negative connotation. Referring to industry lobby groups as having 'shills' and describing a price prediction as 'BS' shows bias and lack of neutrality. More neutral alternatives could include 'traditional', 'mainstream' (used neutrally) , 'representatives', or 'incorrect'. The author also uses emotive language such as "talking sense" and "at last, someone is talking sense".
Bias by Omission
The article focuses heavily on the author's alternative model, potentially omitting other contributing factors to inflation beyond psychological factors and supply chain disruptions. While acknowledging the conventional wisdom (government stimulus and supply chain issues), it downplays their significance relative to the author's theory. This omission could lead to an incomplete understanding of the inflation dynamics.
False Dichotomy
The article presents a false dichotomy by portraying the author's psychological model as the main explanation for inflation versus the conventional model of government stimulus and supply chain issues. The author suggests these models are mutually exclusive, when in reality they could be interconnected and contribute concurrently.
Sustainable Development Goals
The article highlights that during periods of economic uncertainty, businesses tend to engage in price increases, often amplified by herd behavior and media influence. This disproportionately affects lower-income households who have less financial flexibility to absorb price shocks, thus exacerbating existing inequalities.