Yahoo Finance Is Australia’s inflation free-fall over? It would seem so
The bulk of the deceleration in inflation has already happened.
As noted a month ago, the free-fall in inflation is starting to run out of puff. The bulk of the deceleration in inflation is in the bag, so to speak, which is important news for considerations of interest rate risks around the world.
That does not mean that inflation is about to be rekindled – it won’t be. Upside inflation trends will not re-emerge while the global economy is weak, unemployment is rising and supply chain problems are resolved. Restrictive monetary policy settings will also keep a lid on any threat of higher inflation.
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The point is that the easy and obvious free-fall in annual inflation from around 8-10 per cent to 2-4 per cent throughout much of the world has, in broad terms, happened.
Inflation will not fall much more and, if it did, it would be unwelcome given the dislocations that deflation imparts on an economy. Just look at Japan for most of the past 30 years. This is why savvy investors are now looking for the possibility of interest rate cuts in many major markets in 2024 and 2025.
For Australia, which is lagging the global inflation cycle by around three to six months, inflation will continue to decline, even when inflation in many other major economies consolidates around, or a little below, current readings. Already Australia’s inflation rate has fallen from a peak of 8.4 per cent to 4.9 per cent and, on current trends, is set to return to 3-4 per cent in the next couple of quarters and then to the Reserve Bank’s (RBA) 2-3 per cent target in the first half of 2024.
Commodity prices and inflation
A particularly useful guide to medium-term inflation pressures is the trend in commodity prices. In the inflation breakout from 2020 to 2022, the Commodities Research Bureau (CRB) index of commodity prices rose by around 165 per cent, spurred by supply chain problems and massive demand driven by massive policy stimulus. This is a huge increase in a short time period.
In that climate, it was no wonder inflation around the world rose from 1-2 per cent to 8-10 per cent. With the inflation free-fall from the middle of 2022, the CRB index fell 20 per cent between May 2022 and March 2023. This was a critical element in the inflation decline.
But things are moving in the commodities market. After tracking broadly sideways between April and July 2023, commodity prices have increased by 10 per cent in the past two months which, if sustained, points to a consolidation in the inflation outlook.
At a simplistic headline level, this is being seen in petrol prices, which have increased in line with the rise in global oil prices. More subtly, the rise in the price of timber, copper, iron ore and other commodities can, with a lag, feed into broader producer and consumer price pressures if these gains are sustained. That said, it is important to note that, even with the recent uptick, commodity prices are around 10 per cent lower today than at the recent peak.
Wages growth eases
Another positive for inflation remaining low is the fact that wages growth is easing in most countries, including Australia - where annual growth in the wage price index has stabilised around 3.5-3.75 per cent. This suggests firms who deliver solid productivity gains can have price changes that are consistent with inflation targets.
Suffice to say, the next three to six months will likely see inflation rates in the major economies consolidate in a broad 2-4 per cent range. The inflation free-fall has moved to a consolidation phase.
In 2024, the same factors that were high profile during 2022 and 2023 will determine the next inflation inflection point – growth, unemployment, wages, commodity prices and supply chains, and the stance of monetary policy.
With monetary policy already at a restrictive level, and the other inflation drivers generally weak, the odds favour inflation being in check and moving to levels that are consistent with most central bank targets, even if the bulk of the inflation free-fall is behind us.
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