We’re in a new age of inflation. Can we talk about how to fix it?

Back in 2018, wages growth had been serially undershooting the Reserve Bank’s forecasts, so then-governor Philip Lowe wanted to boost them. He could have cut interest rates to stimulate demand, but he chose to talk wages up instead. Among his arguments was the warning that “slow wages growth is diminishing our sense of shared prosperity. If this remains the case, it can make needed economic reforms more difficult.”

Lowe went on to blot his copybook in multiple ways: he gave Australians the impression that pandemic-era zero interest rates would be around for much longer than they were; he misread the causes of the pandemic/Russia-Ukraine inflation spike (and then, in the view of inflation hawks, responded too late to that spike). But in 2018, he proved prescient about the link between living standards and the community’s tolerance for policy changes deemed necessary by political elites.

Eight years later, it’s a very different world. The main problem with living standards today isn’t low wages growth, but high inflation. The challenge for reform-minded policymakers isn’t pursuing further reform, but preventing policy backsliding: an expansion in the size of government as a proportion of the economy, a return to protectionism and a retreat from free trade, and cuts to migration that would worsen workforce shortages. Indeed, the current bout of declining living standards has created the risk of handing power to a party hostile to the entire free-market project, and eager to tear down basic elements of it.

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A new era of inflation has been coming for years, created by greater international conflict and instability like the Ukraine or Iran wars that push up energy prices; the climate crisis and the impact of extreme weather on commodities (including the ability to transport minerals); poorer productivity growth; Sinophobic panic about supply chains and the ensuing onshoring of expensive, unviable manufacturing in Western countries; persistent demography-generated labour shortages; rising protectionism like Australia’s aggressive anti-dumping regime; and a highly concentrated economy in which corporations have the power to increase mark-ups and price-gouge.

The disinflationary forces countering these aren’t nothing, but at this point they appear insufficient: China’s determination to dominate strategic technologies, and its desire to find export markets beyond the US, and the creation of a glut of products like solar panels and electric vehicles (the latter have been a key part of Australians’ response to the latest Trumpflationary surge in energy prices). The potentially massive productivity benefits of AI are yet to fully appear. And robotics can produce machines that run faster than Usain Bolt, work in specialised environments like factories and deliver food, but can’t yet address the increasingly common problem of shrinking workforces.

None of these drivers of inflation are amenable to monetary policy as controlled by an independent central bank via interest rates, which has been the primary anti-inflation mechanism in the standard economic policy framework since the 1990s, for better or for worse (the RBA’s performance in keeping inflation within its target band has been underwhelming since the financial crisis). Some of them aren’t particularly amenable to influence by a middle-sized power like Australia, full stop — though perhaps cheering on the Trump-Netanyahu war on Iran, which the Albanese government initially did, wasn’t the smartest move. But the shift into a more inflationary era surely demands that policymakers stop with their mindless reliance on an independent central bank and start thinking creatively about a new anti-inflationary toolbox.

What could be in there? More aggressive competition laws, including break-up powers for existing oligopolists, to target Australia’s long-running and worsening problem of overly concentrated markets. Abolishing the iniquitous anti-dumping system, which sees the government deliberately making products like groceries and building supplies more expensive at the behest of uncompetitive local manufacturers. Removing all remaining tariffs on imports, rather than waiting to use them as bargaining chips in so-called “free trade agreements” (to be fair, Treasurer Jim Chalmers has already undertaken two rounds of abolishing nuisance tariffs). Removing local content requirements for government procurement, and selecting best value for money.

But those are all just sensible, pro-competitive policies that we should be pursuing anyway, even if they’re anathema to politicians. Other, more ambitious ideas have been around for decades. In a key paper from 1997, economist and national treasure Nicholas Gruen proposed an independent “Central Fiscal Authority” with a mandate to adjust fiscal policy to achieve certain goals (not merely or specifically inflation). If charged with managing inflation, such a body could rapidly adjust income tax levels (or, potentially, even the GST rate) by a limited amount in response to the CPI.

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Back in the 1990s, Gruen noted one drawback: “despite their isolation from day-to-day politics and their professional expertise (or perhaps in some cases because of it), the staff of the independent agency could make worse decisions than politicians”. He’s been proved right, given the poor performance of the RBA in keeping inflation within the target band for much of the past two decades. (I would go further and argue that, until the pandemic, politicians actually did a good job of balancing inflation and unemployment in their budget settings.)

If some of the inflation-fighting work were shifted on to income tax, then mortgage-holders, who bear most of the burden currently, could offload some of that burden to all workers. Using GST would shift the burden to all consumers, including older, mortgage-free asset owners who continue to drive spending regardless of tighter monetary policy. An alternative to such an approach is for an independent body to bump up the compulsory super level, so that workers lose income not to the federal budget, but to their retirement savings. Though, as the ABC’s Michael Janda noted, this wouldn’t remove that money from the economy — it would merely be shifted from consumption to investment, undermining its impact on inflation.

A cross-economy windfall profits tax system could also act as a deterrent to corporations exploiting their market power to push up inflation — the kind Australia experienced in the wake of the pandemic. While the idea would induce pearl-clutching from the business sector and their media cheerleaders, we already have an oligopoly-targeting windfall profits tax on the banking sector, introduced by the Coalition, and the Productivity Commission proposed to keep the corporate tax rate for large companies at 30%, on the basis that so much of their profit is derived from economic rent. Taxing windfall profits generated by oligopolists is already part of the policy furniture in Australia.

Relying on the RBA to deal with inflation made more sense in the 1990s, when the world was set for a prolonged period of post-Cold War stability, there was still time to rationally deal with the threat of a climate crisis, free trade and globalisation were giving consumers a massive disinflationary benefit, and the costs of protectionism were still fresh in the minds of policymakers. With a variety of exogenous inflationary threats coupling with a more concentrated economy and protectionism that has lurched from the grave, the inflation story is now very different. Acknowledging that might be a good place to start for the major parties, which face a cost-of-living-driven threat of rampant populism.