Australia needs insurance against future inflation

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Climate change is another long-term risk. Massive flooding like that seen in northern New South Wales is becoming more regular. Aside from the devastating impact on communities, they destroy crops and can disrupt major transport routes, leading to shortages and more expensive vegetables.

Climate change is also increasing the risk of drought, which affects everything from beef production to water-intensive crops like almonds. Lower supply in times of drought with sustained demand will also result in higher prices.

Left unchecked, climate change will continue to destabilize food production in Australia and cause sharp price fluctuations.

So what can be done to protect Australia from runaway inflation in the future?

The Reserve Bank has been paying a lot of attention to what it is doing about inflation, which drives up interest rates. This encourages people to spend less, removing some of the demand from the economy.

But as Treasurer Jim Chalmers said last week, inflationary pressures come from both strong demand and tight supply and the government must do what it can to help. And there are certainly things the government can do to keep inflation under control.

Better diversity in our supply chains and more local manufacturing will help protect Australia from the worst global disruptions. This does not mean a return to protectionism, or even a return to local car manufacturing.

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That means we’re making sure that we’re still making certain things locally, so when the next pandemic happens, we already have the manufacturing capacity and the know-how to move into making things that are all of a sudden a bit harder to find.

It also means buying more from a wider variety of exporters. The trade agreements with the United Kingdom and the European Union which are currently being drawn up will help.

It would make the products a bit more expensive if we didn’t just rely on the cheapest producer for their products. But think of it as insurance: paying a little more for more stability should cost less in the long run than paying less most of the time, but then paying through the nose when a crisis hits that supply chain.

What about climate change mitigation? Well, this will hopefully help reduce the frequency of catastrophic weather events which have a huge financial effect on the economy beyond their impact on inflation.

This year, inflation will get worse before it gets better.

Soon we will know exactly how high inflation has been over the past 12 months when the Australian Bureau of Statistics releases its data on Wednesday. Economists expect it to hit at least 6%, and the Reserve Bank governor has warned it could hit 7% by the end of the year before it starts falling again .

A little inflation keeps the wheels of the economy turning, but too much creates instability and can lead to big problems down the road.

The Reserve Bank will continue to raise interest rates in its attempt to calm demand, but the government needs to consider longer-term solutions to ensure future inflation is kept under control.

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