Most advanced economies of the world have largely not had to worry about rising inflationary problems for a long time and here in Australia, it’s been very well controlled since the early 1990s.
Throughout the pandemic, the financial world has been talking about transitory inflation which has been seen as a positive economic development as it reflects when financial stimulus (in this case from Governments) creates a surge of economic activity (think Job Keeper spending) that temporarily increases the demand and therefore cost of things (think toilet paper).
A short term slugging of $5 for a single roll of toilet paper doesn’t sound like a positive development but think how much worse things would have been if people didn’t get Job Keeper and/or businesses went broke (hopefully no toilet paper businesses!)…
However, it’s clear the advanced global economies are preparing for inflation that is more than just transitory, where the cost of goods and services continues to rise or stay uncomfortably elevated particularly in the energy and fuel sectors. Essentially, we’ve seen the global stimulus go a bit too far for a bit too long and now our Reserve Bank has to contend with the compounding inflationary pressure of the Ukraine invasion that has completely disrupted the gas and oil markets, among many other commodities.
Luckily for Australia, we are big suppliers of things the world wants; iron ore, coal and gas in particular so our economy is coping relatively well and enjoys very low unemployment putting upward pressure on wages. This is good news for Australia but creates a double-edged sword for the RBA:
- Raise interest rates too slow and, combined with possible wage increases, inflationary pressure is compounded.
- Raise interest rates too fast to slow inflation, they risk handbraking the economy like we saw after cash rates hit 17.5% in 1990.
Threading this needle is an unenviable task for the RBA and one tool they have used effectively is to communicate their intentions well in advance.
In November last year, the RBA commented that ”it is now also plausible that a lift in the cash rate could be appropriate in 2023”. Since then, the monthly RBA statements have been preparing Australians for multiple cash rate increases sooner, starting with this month’s rise to 0.35%, which the investment markets had already adjusted in anticipation. Equity markets continue to reprice on inflation data announcements and property price growth has slowed, now tipped to slightly fall in the eastern states. The point is that even in times of a global pandemic/war/tech disruption, the RBA’s system of managing inflation by communicating monetary policy well in advance has thus far worked and served Australia well.
Will Chapman Dip FS(FP)
Authorised Representative (No 311745)