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12 inflation jargons explained: Everything you need to know

People shop at a supermarket as inflation hits the price of fresh produce.
Inflation is at its highest level in more than two decades. (Source: Getty)

Government officials, experts, economists and even the media are consumed by Australia’s surging inflation.

And it's not surprising, given headline inflation is now more than 5 per cent for the first time since 2001, and isn’t showing any signs of slowing.

In fact, Reserve Bank of Australia (RBA) governor Philip Lowe recently appeared on the ABC and told us inflation would likely get to 7 per cent by the end of the year and that the bank would have no choice but to hike rates to help bring prices down.

Also by Michael Yardney:

Inflation in the US has hit a 40-year high, sparking concern that Australia will follow suit.

Not surprisingly, the media was full of negative messages, and consumer sentiment plummeted due to concerns about rising interest rates and the possibility of a recession.

But, as interesting as the topic is, sometimes all messaging can be as clear as mud because talk about inflation is littered with jargon.

Core inflation, supply chain problems, interest rate hikes - these terms can be confusing.

Or maybe some of these terms you’ve never heard of before at all.

Here is a list of the 12 key inflation jargon terms that you need to know right now.

Inflation

Inflation is a persistent, substantial rise in the general level of prices related to an increase in the volume of money, resulting in the loss of the value of currency.

Put simply, there are factors which affect the prices of certain items in the short term and factors that affect the prices of some items in the long term (supply chain issues caused by the war in Ukraine or the lockdown in China, for example).

But the only thing that affects the price of all items at all times and over a long period of time, is the volume of money.

What is key to understand is that inflation itself isn’t something to be worried about.

Inflation is not only normal, but also good for the economy.

It only becomes a concern when the amount of inflation is extreme. And this is why inflation has become such a hot topic of conversation right now.

In Australia, the inflation rate accelerated to 5.1 per cent in the first quarter of 2022 from 3.5 per cent in Q4, 2021, surpassing market estimates of 4.6 per cent and marking the highest reading since the introduction of the Goods and Services Tax (GST) in the early 2000s.

The surge has been driven by higher housing-construction costs and higher fuel prices.

In other words, prices for goods in the first quarter of 2022 were 5.1 per cent higher than in the same period last year.

That is the biggest increase in more than a decade and significantly higher than the Reserve Bank’s 2-3 per cent target.

And there is more to come - as I said, experts are pointing to inflation of 7 per cent by the end of the year.

A chart showing the inflation rate and the change in inflation rate since 1960.
(Source: supplied/Macrotrends)

Core inflation rate

While headline inflation is calculated as the year‐on‐year change in the overall CPI compiled by the Australian Bureau of Statistics (ABS), the core inflation rate is the change in prices of goods and services excluding those in the food and energy sectors.

These sectors are excluded because they’re deemed to suffer from temporary price volatility which can skew the outcome.

Instead, experts look at the core inflation rate of more stable goods and services to get a better idea of long-term trends.

Australia’s core inflation rate increased to 3.7 per cent in March 2022.

CPI

The Consumer Price Index (CPI) is the most well-known indicator of inflation in Australia.

It measures the percentage change in the price of a ‘basket’ of goods and services - including thousands of items that Australians typically purchase.

A chart showing the different groups in the CPI 'basket'.
(Source: supplied/RBA)

In Australia, the CPI is calculated by the ABS and published once a quarter.

To calculate the CPI, the ABS collects prices for thousands of items, which are grouped into 87 categories (or expenditure classes) and 11 groups.

Every quarter, the ABS calculates the price changes of each item from the previous quarter and aggregates them to work out the inflation rate for the entire CPI basket.

Deflation

Deflation is the opposite of inflation and is when there is a sustained decrease in the average price level of goods and services.

Deflation is as undesirable as high inflation - no one wants to see the value of their assets go down.

Deflation tends to occur less often and for shorter periods than inflation - it’s usually present during times of recession or economic crisis.

The problem is it can lead to a downward spiral because companies respond to falling prices by slowing down their production, which leads to staff layoffs, higher unemployment and salary reductions, which further lowers demand and prices.

Disinflation

Disinflation is a temporary slowdown in the growth of the inflation rate.

Unlike inflation and deflation, which refer to the direction of prices, disinflation refers to the rate of change in the rate of inflation.

Hyperinflation

Hyperinflation is a rapid, excessive increase in prices in an unusual or out-of-control manner.

In extreme cases, this type of inflation leads to the collapse of the monetary system or even the economy, and there is no accurate numerical indicator of hyperinflation.

Hyperinflation is rare but it has occurred in some countries such as China, Germany, Russia, Hungary, and Argentina.

For example, in 2008, Zimbabwe had the second-highest incidence of hyperinflation on record. The estimated inflation rate for Nov 2008 was 79,600,000,000 per cent.

It came about as a result of the economy undergoing numerous economic shocks - high debt, export decline and confidence drop.

The highest hyperinflation rate was Hungary in 1946, with a daily inflation of 195 per cent.

Hyperinflation can be extremely harmful to consumers. If the cost of living rises considerably more than salaries, the standard of living goes down.

Cash rate

The cash rate is a figure set by the RBA, representing the interest that lenders have to pay on unsecured overnight loans between banks.

It's a tool the RBA can use to help control inflation.

By raising this benchmark interest rate - which influences a wide array of other interest rates, like those on credit cards, auto loans, and mortgages - it becomes more expensive for people to borrow money to buy things.

This should, in turn, reduce the cost of goods and services, therefore reducing inflation.

Earlier this month, the RBA raised interest rates for the second month in a row, hiking the cash rate target by a larger-than-expected 50 basis points to 0.85 per cent.

It was the largest monthly rate hike since February 2000 and pushed rates higher than they were prior to the start of the COVID-19 pandemic.

In an effort to tackle Australia’s high inflation rate, the RBA is expected to hike rates to as high as 2.5 per cent by the end of next year.

Recession

A recession is defined as two consecutive quarters of negative economic growth (GDP.)

In other words, there is a significant decline in economic activity and this could last for months or even years. It’s usually associated with rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing.

While Australia has avoided a severe recession since the early 1990s, they are considered an unavoidable part of the business cycle - part of the regular sequence of expansion and contraction that occurs in a nation’s economy.

Soft landing

By raising borrowing costs to reduce inflation, the Reserve Bank is deliberating slowing down the economy.

But like with an aeroplane, you want a “soft landing” - not a crash - for the economy.

RBA governor Philip Lowe gestures while discussing inflation.
RBA governor Philip Lowe faces a balancing act when it comes to managing inflation. (Source: Getty)

In other words, the Reserve Bank has started to raise the interest rate to cool the economy and rein in the sharp increases in consumer prices.

But it is a delicate balancing act. Lowering demand too much could push the economy into a recession.

Supply chain or supply side

The supply chain is the entire process of producing and transporting goods, from raw materials to factories to your front door or shopping cart.

When the supply chain gets clogged up somewhere along the way, a “bottleneck” is created. Whatever is stuck on the wrong side of the bottleneck can become more scarce and expensive on the other side, contributing to higher inflation.

Economists currently see pandemic-created bottlenecks everywhere, from homebuilding and heating oil to car manufacturing.

Stagflation

Stagflation is economic stagnation combined with inflation.

In other words, the inflation rate is high, but the economic growth rate slows, and unemployment remains steadily high.

As the current war in Ukraine drives up the prices of commodities such as wheat and oil, exacerbating what is already a trend of rising inflation in much of the developed world, bank traders and some other market commentators have highlighted stagflation as a potential global risk.

Transitory inflation

Transitory inflation, as the name suggests, is inflation that experts expect is only temporary before returning to normal.

So, what causes inflation?

Now we know what inflation is and the jargon around it, let's take a quick look at why this is all happening.

Inflation is chiefly caused by either money supply or pressures on the supply-and-demand side of the economy pushing up prices, or both.

Supply: This is a cost-push inflation, which generally means prices rise in response to higher cost of production, materials or even wages.

The demand for goods is unchanged while the supply of goods declines due to the higher costs of production. Put simply, companies are faced with increased input costs so increase prices to maintain the margins.

Demand: Likewise, inflation can also be caused by strong consumer demand for particular products or services.

Money supply: More money supply will decrease the value of said money. For currency, if there is an increase in the money supply, the value of the currency will fall and will cause an increase in the price of goods.

Should property investors be worried about inflation and rising interest rates?

We have now entered the next phase of the property cycle - one where the market is cooling, and prices are adjusting.

While property prices will correct in some locations, there will not be a property “crash” as some commentators are predicting.

After all, unemployment is low, mortgage stress is low, the risk of rising interest rates is low (recent borrowers would have had to go through stringent lending hurdles to prove they could cope with rising interest rates) and around 50 per cent of homeowners own their home outright, while many have substantial equity.

As far as I’m concerned, the property market is stable and will continue to be.

Sure, some who recently purchased a property and haven’t experienced market cycles may find the current market conditions concerning.

But they should take comfort in the fact that property corrections tend to be short lived, and the Reserve Bank doesn’t want the housing market to crash– it wants that about as much as it wants another strain of coronavirus.

These property owners should remember that the decline in property values will be temporary while the long-term increase in property values is permanent.

A final word…

It's likely that the current situation of high inflation and rising interest rates won’t last too long, and the Reserve Bank has already hinted it may need to lower interest rates in 2023, once it has brought inflation under control.

This means there is a short window of opportunity for property investors who have a long-term focus to take advantage of the markets at present.

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