The latest inflation figures show the strongest underlying growth of prices for six years, but there remains little evidence that Australia is about to enter a period of high inflation.
In the run-up to the release of the latest consumer price index data, economists and commentators have mused about whether we are going to see a breakout of inflation.
Mostly what we have seen is a breakout of people saying high inflation is on the way rather than actual high inflation.
It’s not just an Australian phenomenon. This week the creator of Twitter, Jack Dorsey, tweeted: “Hyperinflation is going to change everything. It’s happening.” He followed this up by tweeting “it will happen in the US soon, and so the world”.
But there is zero evidence of this occurring, and certainly not here in Australia.
The latest CPI figures released on Wednesday by the Australian Bureau of Statistics actually showed a slowing of the annualised inflation rate, from 3.8% in the 12 months to June down to 3% in the year to September.
The so-called trimmed mean rate – which measures underlying or “core” inflation – rose sharply from 1.6% to 2.1%:
But even the 0.7% quarterly growth of underlying inflation in September, which is the biggest jump since 2014, would only translate to an annual growth of 2.8%.
That’s a level easily within the Reserve Bank of Australia’s 2% to 3% target band.
That is hardly inflation running wild.
The main cause of the inflation growth over the past year has been petrol:
Unleaded petrol prices have risen around 40% since the depths of the pandemic last year. So large has the impact been that if we excluded transports costs, inflation over the past year would have risen just 2.3%.
Now obviously that is little comfort, because, unlike other items, it is tough to avoid paying for petrol. But it highlights that a large amount of the inflation at the moment is not due to an overheating economy, but due to world fuel prices and also supply issues amid border closures around the world:
There is also little sense of the financial markets anticipating a massive surge in prices. The inflation expectations based on the rates of Australia government bonds suggests low inflation growth for another six months at least:
It also remains rather far too early to be talking about inflation rising too fast when much of the economy, and the figures themselves, remain affected by lockdowns.
Childcare prices, for example, rose 45% over the past year. But that is due to the recovery of prices from the free childcare that was available during the pandemic last year. Compared to two years ago, childcare prices are up 9.9% – which is actually lower than the average growth since 2010:
The figures also show that there has been a wide difference in price growth across the nation. Prices in Brisbane over the past year rose 3.9% on average while those in Adelaide increased just 2.5%:
With underlying inflation remaining relatively low and price rises across the nation uneven, there is little to suggest the reserve bank is about increase rates on Melbourne Cup Day.
Earlier this month the RBA reiterated that it would “not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range”. It also suggested that this was unlikely to occur “before 2024”.
Nothing in these figures suggests that assumption need change. Things remain far too erratic and subject to potential lockdowns and border closures.
And as the RBA is still currently purchasing $4bn worth of Australian government bonds a week, and the government is still running a historically massive deficit, interest rate rises are well down on the list of things that can be done to cool the economy.
But more so, there is little sense yet that the economy even needs interest rates to rise.