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Inflation shoots to 6.1% – better than expected

 

Australia’s inflation rate was 6.1% year-ended June 2022, up 1.8% in the June quarter and marginally lower than expectations. The quarterly inflation figure was thankfully lower than the 2.1% recorded for the March quarter, a factor that had some commentators suggesting this bout of unsuppressed prices growth may be short lived.

Relevantly, the June quarter data was led by a 5.6% rise in the cost of new dwellings and a 4.2% increase in the costs of automotive fuel. Like many other countries, Australia started the current quarter with softening fuel prices which are expected to flow through to moderated inflation growth in the September CPI.

However, that is little comfort right now, in this winter of pricing discontent that will continue until at least the end of spring and more likely, through to the end of summer. We can assert that because as the head of prices statistics at the ABS, Michelle Marquardt, said:

“Shortages of building supplies and labour, high freight costs and ongoing high levels of construction activity continued to contribute to price rises for newly built dwellings.”

The pipeline of building work still has plenty of work to do and plenty of materials to be paid for and supplied. That alone will continue to contribute to inflationary pressures.

The chart below shows the last decade’s inflation rate – measured by the Consumer Price Index (CPI) – and underscores the drama that has unfolded in the economy since the onset of the pandemic.

Picture1

Statistics Count will consider building costs later in this edition, but it is worth noting the abatement in automotive fuel costs in the next quarter might be a global phenomenon, but just as global is the expectation of persistently higher general energy costs over the next few years. The cost of gas is the main driver, the main cause is Russia and the main pain point will be Europe.

That does not however mean that Australia will be immune from the higher energy costs. In fact, exposure to what are proving to be quite challenging energy policy settings in the eastern states is one of the major issues for domestic manufacturers and industry more generally. The likelihood, as many in the forestry and wood products industries know, is that energy shortages will lead to higher costs that will be baked into higher consumer prices and inflation for some years to come.

The point? It is too easy to blame the pandemic for what in some cases are structural prices and higher costs.

In that context, we turn attention to the more persistent and reliable measure of underlying inflation. Though more moderate, underlying inflation measures are all above the RBA target band of 2-3% per annum. The trimmed mean was 1.5% for the quarter, with the annualised rate, excluding volatile items (like fuel) up 5.3% as the chart here shows.

Picture2

As the inflation rate rises, central banks around the world are pulling the monetary policy levers available to them and increasing interest rates. We can expect to see more of that behaviour in Australia, but it seems increasingly likely local interest rates will not climb as high as those in the US and much of Europe.

Latest data from the US suggests it is almost inevitable there will be a recession in the world’s largest economy and it is just as likely in Europe. China’s economic woes are mounting, but it would be a brave pundit who bet against the strength of China.

As Michael Janda observed on the ABC Online, Australia’s current inflation rate is the steepest since 1990 when Australia entered the recession it had to have. We think it is probably fair to say Australia does not have to have a recession this time around, and it is not forced to follow the US and the UK in all things.

A softer landing seems likely for Australia, with an inflation rate that moderates in 2023. Meantime, we can all hang on for the ride.

Posted Date: July 29, 2022

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