Migrants aren't causing inflation

Perhaps it's because the recent bout of inflation was so unusual – other than failed nation states such as Argentina, Zimbabwe, or Venezuela, it had been over thirty years since most countries had to worry about it – but people really like to blame anything and everything for it except the actual causes.

For example, earlier this year former chair of the ACCC, Allan Fels, pointed the finger at so-called 'greedflation':

"No one looks at the role of prices, price setting, profit margins in relation to inflation, and in relation to what could be done about high prices. The actual setting of prices by business has added quite a lot to inflation. And that's often disregarded. Other things are blamed, monetary policy, war, etc. Business prices contribute a lot to inflation."

Greedflation – the idea that businesses jacked up prices, leading to inflation – is also supported by think tanks such as the Australia Institute, which this week called it "profit-driven inflation":

"In this day and age we've got profit-driven inflation, we've got supply shocks from things like Covid, the war in Ukraine, and we've also increasingly got climate shocks affecting things like the insurance industry very significantly."

But firms are always greedy. If businesses could have jacked up prices in 2019, they would have. Did something change in 2020 to suddenly cause an outbreak of greed that also gave firms monopoly power over prices, including our commodity exporters who sell globally (i.e. are largely price-takers)? Only for that greed to rapidly subside, with the non-mining profit share of income now back to around its long-run average?

Where there is some truth is in the supply shock inflation story. Recently attention has moved to migration, specifically its impact on housing demand and the rental crisis. But some have taken it even further, claiming that migrants have "driven" the recent inflation, as alluded to in tweets like these:

Even Treasurer Jim Chalmers claimed that by "managing" the population (i.e. reducing the migrant intake), he would moderate inflation:

"We're seeing a substantial moderation in inflation in the forecasts and in the last couple of years as well, and that is largely because of how we're managing the budget, but it will also be increasingly about how we're managing the population as well."

Or there was this in a popular Murdoch rag last November:

"This surge in population, combined with the tight rental market, has combined to push Australia's rental inflation through the roof, which is also driving up overall CPI inflation."

To be clear, supply shocks cannot increase inflation beyond the short-run. They can temporarily increase measured inflation because of how the CPI basket is designed. But all a supply shock really does is alter relative prices in the economy. If climate change raises insurance costs, the price of insurance increases relative to all other prices in the economy. If migrants increase the demand for housing, the relative price of housing increases.

Inflation is an increase in the general level of prices. Price rises in housing and rentals incorporate both inflation and their relative price changes. There is no "rental inflation", only a change in the relative price of housing and inflation. As the US Fed makes clear in its explainer, terms like "housing inflation" don't exist:

"Inflation cannot be measured by an increase in the cost of one product or service, or even several products or services. Rather, inflation is a general increase in the overall price level of the goods and services in the economy."

The only way for all prices to rise is if money growth outstrips the demand for money. So, while supply shocks can alter relative prices and measured inflation in the short-run, they cannot "drive" persistent inflation. That includes migrants, who tend to be disinflationary.

What actually causes inflation

Inflation is caused by fiscal and monetary policy. In times of high inflation it's strongly correlated with the money supply, both historically and during the recent surge: