Over the past 5 years, RBA Governor Philip Lowe has had one wish more than anything else and it may be granted much sooner than he is expecting. Australia’s annual inflation rate has jumped to 3.8%, having stayed at 1.1% for the 12 months to March. This June quarter jump to beyond the 2-3% target band has similarly occurred in the US, with inflation at a 13 year high of 5.4% and in New Zealand at 3.3% - showcasing the potential resurgence of high inflation after many years of being dead. What has brought about this astronomical change occurred all of a sudden?
Part of the story can be seen at how the Federal Government heavily subsidised childcare during lockdown last year, pushing the effective price to near zero and with the recent removal of these subsidies, prices has bounced back. Furthermore, petrol prices have climbed since their collapse in lockdown last year, alongside spikes in the prices of seasonal produce such as fruit and vegetables due to recent shortages of harvesters and heavy rainfall. Supply side constraints across the global economy has also seen sharp increases in shipping costs where supplier prices have spiked due to a shortage of supply. However, ‘trimmed mean’ or underlying inflation used by the RBA to see the core level of inflation, has remained at only 1.6%. Inflation in Australia is unlikely to keep facing rises unless wages grow strongly, which is staying quite stagnant at just 1.5%.
