As of October 2022, Australia’s inflation rate has been recorded as the highest in over 32 years. The high inflation levels can be attributed to the knock-on effects of the pandemic, the war in Ukraine and stronger consumer demand.
The most prominent price hikes are in new dwelling purchases by owner-occupiers (+3.7%), gas and other household fuels (+10.9%) and furniture (+6.6%). The quarterly CPI will continue to be Australia’s key measure of inflation, as these new monthly data updates only record inflation on up to 70% of goods and services.
We have also seen large rises in grocery costs, with all food and non-food grocery items increasing in the September quarter. In the 12 months to the September quarter, fruit and vegetable prices rose 16.2%, and dairy products increased by 12.1%.
What is Australia’s inflation rate?
7.3% is the recorded inflation rate as of the September quarter. The RBA hopes to bring inflation to heel by raising rates, and to keep it within that 2-3% goldilocks zone.
Wage -price dynamics in a high-inflation environment
Growth in wages is an imperative driver of inflation. This is because wages constitute a large share of commercial costs. If the growth of wages exceeds the growth in productivity, firms raise prices to preserve margins and profitability.
However, when inflation is already high like it is right now, then an increase in wage dynamics can be a mechanism by which high inflation persists. Employees often seek significant wage increases when inflation is also on the rise, and is expected to remain high for a protracted period to compensate for declining purchasing power.
The other causes of the price increases may include supply chain disruptions, rising energy prices, and unanticipated jumps in demand, causing supplies of various inputs to fall short. With job vacancies and hiring at an all-time high, businesses across most industries are coping by raising wages at rates far surpassing what was considered ‘normal’ pre-pandemic. This could be a result of needing to retain their workforce and attract new staff.
Changes to the Australian dollar
Are you aware that changes in the Australian dollar can cause temporary fluctuations in inflation? A lower exchange rate makes imported items more expensive. This then leads retailers to raise prices. In fact, a third of the items in the CPI basket are sensitive to fluctuations in the Australian dollar.
Supply constraints
Fluctuations in petrol prices are often caused by changes in the supply of oil rather than shifts in how much consumers want to buy. Another important note are events like natural disasters. This can cause widespread supply disruptions, which lead to price rises.
Government policies
Policies such as taxes and subsidies can influence inflation. If you take tobacco prices, for example, they increased by approximately 14% per annum between 2013 and 2020 due to the introduction of a new excise indexation regime.
Forecast – where is inflation headed?
It can be expected, and has been commented on by Central Bank itself, that inflation is expected to continue rising before 2022 comes to an end. This will further seep into 2023 before we see a decline back to the target range (between 2-3%) by approximately 2024.
Therefore, 2023 should mark the beginning of an interest rate decline. It is expected that by mid-next year we should see inflation rates drop to 5.5% before reaching approximately 3.5% by December of next year.