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Australia’s Inflation- Nov 2022

Australia’s inflation woes worsened over the September quarter, with the CPI rising to 7.3%, a 1.8% increase from the previous quarter. This has been a record high since June 1990, when the cash rate setting was at 15%. Clearly, this has been a worrisome sign for inflation hawks, especially since these are unprecedented figures since the inception of inflation targeting in 1993.

While worsening purchasing power and higher material cost of living are tangible effects on consumers, what’s more concerning is the unanchoring of expectations. Since the 2-3% regime was instituted, this has acted to keep expectations within a credible range. Policy could manoeuvre around the target with the certainty that the inflationary forecasts of consumers and investors would largely remain grounded. This is critically important for the reason that high expectations of inflation act as a self-fulfilling prophecy, bringing about actual inflation at a faster rate. The untethering of expectations from this baseline brings about a fresh wave of policy consternation. Should expectations runaway, consumption decisions for durables will be brought forward, inducing demand-pull price pressures.


So why is this so worrying? For one, much of inflation has been attributed to supply-side pressures. Soaring energy prices, supply chain disruptions, flooding and rising shipping costs have continually fed into prices. Macroeconomic policy is ill-suited to handling these challenges, which have proven to be logistical in nature. At the same time, global disorder is not something easily quelled, while Covid continues to impact economies like China. Inflation permanence may well be the new global norm. This breeds a new beast for policymakers to deal with. Rate rises are certainly on the table, but the question remains by how much? The federal budget predicts a cash rate of 3.35% as the peak. Still, the central bank must be careful not to tip the economy into a stagflationary crisis should the tightening prove too contractionary.



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