Pandemic era inflation in Australia

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Executive Summary

This article examines the drivers of pandemic era inflation in Australia.  Mainly it highlights that the inflation spike of 2021–2023 was not primarily caused by excessive demand or fiscal stimulus, but rather by supply‑side disruptions, market power, global commodity shocks, and profit‑driven markups in concentrated industries. The analysis underscores how narratives from policymakers, media, and mainstream economists shaped public perception and policy decisions that are often leading to unnecessary interest rate hikes that disproportionately harmed low‑income households.

The article concludes that MMT‑aligned policies such as targeted price‑stabilisation tools, public provisioning, strategic buffering of labour and materials, and non‑interest‑rate inflation management. 

Introduction

Australia's inflation from 2021 to 2023 was a case of cost-push inflation, stemming from a combination of global and domestic factors that constrained supply and empowered dominant firms. The prevailing public and policy narrative is heavily influenced by media and mainstream economical frameworks. They misdiagnosed inflation as a problem of excessive aggregate demand driven by government stimulus and low interest rates. This narrative diversion shifted policy focus away from the root causes that are global supply-chain fragility, energy market failure, and unprecedented corporate pricing power.

The primary policy response, therefore, became an aggressive campaign of monetary tightening by the Reserve Bank of Australia (RBA). These rapidly rising interest rates were fundamentally poorly targeted, as they could not fix supply-chain bottlenecks or regulate oligopoly mark-ups. The consequence of this monetary approach was not just ineffective inflation management but a significant transfer of wealth. It redistributed income from borrowers and renters towards banks, landlords, and asset holders, exacerbating economic inequality during a period of severe cost-of-living hardship.

A Modern Monetary Theory (MMT) and Post-Keynesian (PK) perspective offers a different framework. It posits that inflation is a sector-specific phenomenon rooted in real resource constraints and institutional structures, particularly market concentration and administered prices. From this viewpoint, effective and equitable management required targeted fiscal and regulatory interventions such as anti-profiteering measures, strategic public investment in capacity, and direct protection of real incomes rather than the blunt, demand-cutting mechanism of interest rate hikes. This article elaborates on these drivers, critiques the policy response, and proposes a comprehensive, MMT-informed policy toolkit for managing structural inflation.

The re-emergence of significant inflation in Australia post-COVID-19 marked the end of a protracted period of price stability. From mid-2021, consumer price growth accelerated, peaking at over 7%, driven by a volatile global environment, including pandemic-induced disruptions, energy market turmoil, and geopolitical conflict. Crucially, the Australian experience was also amplified by several factors such as a highly concentrated corporate sector, a uniquely sensitive, financialised housing market, and long-standing underinvestment in domestic production capacity.

The immediate reaction within mainstream economic commentary and political discourse was to frame inflation as a result of "overheating." Terms like "excessive stimulus," "demand surge," and central bank "money printing" quickly dominated the discussion. This adherence to traditional monetarist and neoclassical demand-side theories was problematic, as it flew in the face of observable facts. Wages were not rising to meet prices; labour's bargaining power was historically weak; and price increases were highly concentrated in specific areas defined by supply bottlenecks and oligopolistic market structures (fuel, housing, construction, groceries).   

Post-Keynesian and MMT economists provided an immediate and accurate alternative diagnosis: inflation in modern economies is primarily a real-resource problem, not a simple monetary phenomenon. Inflation occurs when the necessary inputs such as energy, logistics capacity, construction materials, skilled labour hit their supply ceilings. In this context, Australia’s inflation was largely a strategic, profit-led, and imported phenomenon. The logical policy response should have been supply-side intervention, price regulation, and income protection, entirely bypassing the RBA's ineffective and damaging reliance on interest rate increases.

This article details the structural drivers of Australia’s pandemic-era inflation, critically analyses the prevailing narratives, explores the theoretical depth offered by the PK/MMT paradigm, and concludes with targeted, structural policy recommendations for a more effective and equitable inflation management strategy.

Discussion

i) What is inflation and how can it be measured?

Inflation is the persistent rise in the general price level. In Australia, the Consumer Price Index (CPI) remains the primary metric, tracking changes in the cost of a representative basket of goods and services. Calculated quarterly by the ABS, the CPI is essential for monitoring the cost of living.

However, the CPI's utility as a policy guide is limited by its design. First, it is an average, failing to capture the vastly different inflation rates experienced by various income groups. For low-income Australians, who spend a much greater proportion of their income on non-discretionary items like food and fuel, the effective inflation rate they face is often much higher than the headline figure, intensifying the regressive impact of inflation. Second, the measurement of housing costs is complex: it captures new dwelling purchases but excludes mortgage interest payments (which are viewed as a financial cost), thus obscuring the immediate and direct impact of the RBA’s own interest rate hikes on household budgets.

The RBA's focus on  underlying or  trimmed mean inflation which attempts to strip out volatile price movements and it was particularly misleading during the pandemic. When the core problem is volatility driven by global shocks (like energy or logistics), excluding those items prevents an accurate diagnosis of the inflationary environment.

The MMT/PK perspective insists that a successful policy response requires understanding the type of inflation at play. Inflation can be imported (e.g., oil prices), administered (e.g., utility prices set by monopolies), profit-push (due to mark-up power), or conflict-driven (wages pushing against profits). The pandemic-era inflation was a complex blend of the first three, demanding a highly specific, sector-by-sector response.

ii) What were the key drivers of pandemic-era inflation? How does this differ from past inflationary periods?

Australia’s pandemic-era inflation was driven by a combination of global shocks, domestic bottlenecks, and structural features of its economy. These drivers were predominantly cost-push and supply-side in nature.

1. Global supply chain disruptions

COVID-19 lockdowns in major manufacturing hubs, shipping container shortages, port closures, and labour disruptions created massive delays and cost increases for imported goods. Australia, which relies heavily on imported manufactured products, automobiles, electronics, and medical supplies, experienced significant price increases in goods that previously had stable prices for decades. The shift in global consumption from services to goods exacerbated these pressures. Many goods simply could not be delivered on time, giving firms justification for price hikes or reduced discounting.

2. Energy price shocks and domestic energy market design

Global oil and gas markets were highly volatile due to geopolitical tensions, most notably the Russian invasion of Ukraine. Australia’s east-coast gas market that is dominated by a handful of producers and poorly regulated experienced sharp price spikes, despite the country being one of the world’s largest LNG exporters. This  so-called gas cartel behaviour filtered into electricity generation costs and raised prices across energy-intensive sectors.

3. Corporate pricing power and profit-push dynamics

A defining characteristic of the Australian economy is its high degree of market concentration. Supermarkets (Coles and Woolworths), airlines (Qantas), construction suppliers, and energy retailers operate in oligopolistic environments. During the pandemic, many of these firms increased mark-ups, often above what rising input costs could justify. Evidence from corporate financial reports indicates that profit margins rose significantly in sectors with limited competition, suggesting that a portion of inflation was profit-led rather than cost-led.

4. Housing market pressures

Rent inflation accelerated due to a collapse in rental vacancy rates, a surge in migration, and the pass-through of interest-rate increases to renters. Construction costs rose due to material shortages and labour bottlenecks, leading to delays and higher prices for new builds. The housing sector became a major contributor to the CPI.

5. Labour markets not a driver of inflation

Crucially, wages in Australia did not drive inflation. Real wages fell sharply, and nominal wage growth remained far below inflation. The institutional weakness of unions, centralised bargaining frameworks, and the absence of full employment conditions meant that workers had limited bargaining power. The wage-price spiral narrative therefore lacked empirical grounding.

Comparison with past inflationary periods

The pandemic-era inflation contrasts sharply with the inflation of the 1970s, which involved strong unions, centralised wage bargaining, and widespread wage-price dynamics. Today, labour share of income is historically low, union membership has declined significantly, and wages have stagnated. The dominant inflation drivers were global and structural not domestic wage pressure or excessive demand.

iii) What has the discourse around pandemic-era inflation looked like among economists, policymakers, and the media?

The prevailing public and policy discourse acted as a critical barrier to effective policy. It consistently favoured demand-side explanations over supply-side realities, effectively framing the crisis in a way that legitimised only one tool: interest rate hikes.

• The Neoclassical Consensus: The default setting for most central bank and Treasury economists remained the model where inflation is a function of excess aggregate demand relative to aggregate supply. Within this framework, monetary policy is the most effective and politically palatable tool for dampening demand. They argued that the pandemic fiscal stimulus, combined with the RBA's Quantitative Easing (QE) program, had created an "inflationary gap." This view, however, fails to explain the sectoral unevenness of the inflation or the decade of low inflation that preceded the pandemic despite persistent QE and deficits.

• Media narratives: The old monetarist slogan, "too much money chasing too few goods," permeated media commentary, simplifying a complex structural problem into a moral tale of government overspending. Media outlets frequently used the "household budget analogy," urging government austerity and household belt-tightening. This narrative successfully constrained public debate, increasing the acceptance of interest rate increases as a necessary pain, while shielding corporate pricing power from scrutiny.

• The RBA's Framing: The Reserve Bank's own justification for its aggressive rate hikes centered on the need to anchor "inflation expectations." The RBA argued that without dampening demand, workers and firms would expect high inflation and embed it into wage and price setting, thus triggering a self-fulfilling spiral. This theoretical concern was leveraged despite the empirical reality that workers had no power to set prices or wages, making the supposed wage-price spiral a remote, theoretical threat rather than an existing reality.

iv) What economic narratives underpin the understanding of, and responses to, inflation?

Policy responses during the pandemic reflected underlying economic narratives that shape how inflation is understood.

The neoclassical narrative

The dominant view in orthodox economics is that inflation is caused by excess demand over supply. Prices adjust to equilibrate markets, and interest rates are the primary tool for controlling demand. This narrative underpins central bank inflation targeting frameworks and justifies the use of monetary tightening.

The monetarist narrative

Although less influential than in the past, monetarist ideas still shape public discourse. The slogan “too much money chasing too few goods” appears frequently in media commentary, despite the limited empirical relevance of the money supply in modern monetary economies. This narrative was especially prominent when discussing the RBA’s bond-buying program.

MMT and PK critique

MMT and PK economists argue that inflation arises when real resources—not money—are scarce. Public deficits themselves are not inflationary unless they push spending beyond productive capacity. Inflation is a structural phenomenon shaped by sectoral constraints, market power, and institutional context.

Political narratives

Political discourse amplifies household-budget analogies and emphasises fiscal “responsibility.” These narratives constrain the policy imagination and limit consideration of non-monetary tools such as public provisioning, strategic stockpiles, or price regulation.

v) How does this connect to Post-Keynesian theories regarding price setting?

Post-Keynesian theory views inflation through the lens of administered prices and mark-up pricing. Firms set prices based on normal costs plus a desired profit margin, not through marginal productivity or competitive price-taking. Prices are determined by:

• Unit labour costs

• Prices of intermediate goods

• Market concentration

• Bargaining power

• Expectations

• Sectoral capacity constraints

• 
  

During the pandemic, these dynamics operated strongly in Australia. Oligopolistic sectors increased margins in response to higher costs or even in anticipation of them. In concentrated markets, firms often move prices together, creating a coordinated inflationary effect without explicit collusion.

The Post-Keynesian framework therefore explains why inflation was uneven across sectors, why it persisted even as demand stabilised, and why wage restraint did not automatically reduce inflation. It also clarifies why interest-rate hikes, which affect aggregate demand, have limited power over price-setting behaviour in key industries such as supermarkets, energy, transport, and housing.

vi) What would be the policy implications of Post-Keynesian and MMT-informed theory for the pandemic-era inflation?

An effective and equitable response to structural inflation requires abandoning the single-instrument approach and adopting a broad toolkit focused on real resources, institutional structure, and income protection.

1. Targeted Supply-Side Investment: Fiscal policy must be used to relieve the precise bottlenecks causing inflation.

   • Public Investment in Logistics: Directly fund and operate key logistics infrastructure (ports, rail capacity, long-haul trucking) to reduce transportation costs.

   • Strategic Public Stockpiles: Create national reserves of critical imported goods (e.g., key building materials, pharmaceuticals) to smooth prices during global supply shocks.

   • Capacity Expansion: Invest directly in domestic manufacturing capacity to reduce reliance on fragile global supply chains, especially for essential inputs.

     
     

2. Regulate Market Power and Prices: Directly address the profit-push dynamic.

   • Strengthen Competition Laws: Dramatically increase penalties for anti-competitive behaviour and institute mechanisms to scrutinise and cap mark-ups in concentrated, essential sectors (groceries, fuel, utilities).

   • Windfall Profit Taxes: Levy temporary, high taxes on the excessive profits generated by firms that benefited from crisis conditions (e.g., gas exporters, certain large retailers), deterring opportunistic pricing.

   • Administered Price Reform: Introduce a public utility system or strong regulatory framework for energy to decouple domestic prices from volatile global export markets.

     
     

3. Fiscal Stabilisation and Income Protection: Use fiscal policy for equity and stability.

   • Essential Goods Subsidies: Offer temporary, targeted subsidies on essential goods (e.g., bread, milk, public transport) to reduce the cost of living directly without broad-based stimulus.

   • Social Housing Guarantee: A massive expansion of public and social housing construction would increase supply, reduce reliance on private rental markets, and structurally lower rent-driven inflation.

   • Real Income Supports: Increase unemployment benefits (JobSeeker) and pensions to protect the most vulnerable from price shocks, as they were not the cause of inflation.

     
     

4. A Job Guarantee as an Anti-Inflationary Anchor: MMT proposes a Job Guarantee where the government offers a continuously available public job at a minimum living wage to anyone who wants one. The job guarantee (JG) acts as a buffer stock for labour. When private sector demand falls, people move into the JG; when demand rises, they move back out. This stabilises wages and provides full employment without being inflationary, as the JG wage acts as a non-inflationary anchor at the bottom of the wage distribution.

   
   

5. A Redefined Role for Interest Rates: MMT argues that interest rates should be kept low and stable. They should not be used as the primary tool for managing inflation or employment, as their effects are regressive and poorly targeted. A low rate environment reduces the burden on borrowers and weakens the speculative element of the housing market.

Conclusion

Australia’s post-pandemic inflation was a failure of structure and policy. Driven by global supply shocks, domestic energy failure, and unchecked corporate pricing power, it was a cost-push crisis. The dominant policy response that was aggressive monetary tightening was guided by a flawed demand-side narrative, leading to a catastrophic misdirection of resources and a significant rise in economic inequality.

The Post-Keynesian and MMT framework offers a vital corrective. It diagnoses inflation as a systemic problem rooted in market institutions and real capacity constraints. By shifting the policy paradigm away from blunt demand suppression and toward targeted fiscal, regulatory, and supply-side actions, Australia can build a macroeconomic framework that is both more effective at achieving price stability and far more equitable in distributing economic burdens and benefits. Resilience and shared prosperity are best achieved not through austerity and rate hikes, but through direct intervention to build capacity and limit exploitation in key markets.

Recommendations

In the future, Australia may face crises similar to COVID-19. To reduce the impact of such events, the following policy measures are recommended:

1. Strengthen Competition and Pricing Scrutiny: Introduce new legislation granting the Australian Competition and Consumer Commission (ACCC) the power to investigate and cap excessive profit mark-ups in concentrated, essential sectors (groceries, energy, building materials) during periods of national crisis.

2. Fund Strategic Public Provisioning: Immediately fund major public investment in logistics (port and rail systems) and establish a national stockpile of critical inputs to mitigate future import price volatility.

3. Reform Energy Pricing: Introduce a transparent, effective price regulation mechanism for the domestic gas and electricity market to decouple household and industrial energy costs from global LNG export prices.

4. Massive Social Housing Expansion: Implement a multi-year, large-scale public housing construction program to structurally address rental inflation and construction bottlenecks.

5. Rebalance Macroeconomic Tools: Officially shift the primary inflation-fighting responsibility to targeted fiscal policy and relegate interest rate increases to a secondary, stability-focused role.

6. Protect Vulnerable Incomes: Mandate significant, inflation-linked increases to all welfare payments (including JobSeeker) and reform industrial relations to strengthen collective bargaining for low and middle-income workers.

7. Explore a Job Guarantee: Conduct a feasibility study and pilot program for a Public Job Guarantee to establish a non-inflationary employment and wage anchor for the Australian economy.

References

ABS (2023). Consumer Price Index, Australia. Australian Bureau of Statistics.

RBA (2023). Statement on Monetary Policy. Reserve Bank of Australia.

OECD (2023). Economic Outlook: Australia.

Lavoie, M. (2022). Post-Keynesian Economics. Palgrave.

Mitchell, W., Wray, L. R., & Watts, M. (2019). Macroeconomics. Red Globe Press.

Borio, C. (2022). Inflation: The return of an old enemy? BIS Working Papers.