Inflationary pressures are a reminder that interest rates will rise, eventually
Persistent disruptions to international supply chains caused by the pandemic, high demand for goods and soaring energy prices have combined to push consumer prices higher in many countries.
Some prominent economists have even made comparisons to the 1970s, when economies were plagued by stagflation – the ugly combination of high inflation and low growth.
So far, inflationary pressures in Australia have been more subdued than in other advanced economies.
But Bureau of Statistics figures released Wednesday showed widespread price increases. A key measure of core inflation (which explains the temporary volatility) reached a six-year high of 2.1% in the year ending September. The annual headline rate was 3 percent, which sits at the top of the Reserve Bank’s inflation target.
Australians are starting to anticipate a rise in the cost of living. Each week, an ANZ-Roy Morgan survey asks a representative sample of consumers how they expect prices to change over the next two years. The latest poll showed the average expectation was a 5% increase, the highest in over six years. A recent surge in fuel costs has likely been a driver of higher price expectations. The average price of unleaded gasoline in Australia hit an all-time high of 169.5 cents per liter last week according to stock broker CommSec.
Recent public statements by the Reserve Bank suggest that it is not yet convinced that current inflationary pressures will persist. The minutes of the bank’s board meeting in September stated that “most central banks in advanced economies continued to characterize price increases related to the pandemic as temporary or ad hoc which would only have a transitory effect on inflation “.
Inflation data is still skewed by disruptions from the pandemic, complicating the pricing outlook. It may take several months for the image to become clearer.
For much of the past decade, the Reserve Bank has tolerated an inflation rate well below its target range of 2 to 3 percent. This period was also marked by very weak wage growth.
In the years leading up to the pandemic, the RBA was one of many central banks trying to stage a move towards higher inflation and stronger wage growth – which now appears to be happening.
This suggests that the Reserve would tolerate inflation slightly above its target range for some time if it helped lower the unemployment rate and put upward pressure on wage growth.