First, some good news: the rate of inflation is falling. As the next chart shows, the headline rate has fallen from 7.8% in the last three months of last year to 7% in the first three months of 2023. So we are heading in the right direction.
But don’t expect that good news to turn into smiles down at the shops. The fall is small. Inflation is talked about like it’s a concrete thing we notice at the shops, but it is in fact very abstract. What we experience is prices. Inflation is just a measure of how fast prices rise.
In mathematical terms it is a first derivative — it measures the rate at which something changes. And when that first derivative gets smaller, when the rate of inflation changes from 7.8% per annum to 7%, it doesn’t put a spring in our step. What people will notice, actually, is that prices are still bloody going up, by 7%!
Now the bad news.
Inflation is changing its nature. At the beginning, it was all about goods, especially imported goods like fuel. But now goods prices are growing slower than expected or even falling. Instead, inflation has spread into services, especially non-tradeable services. That could be a bad sign — services are made here by Australian people, and high services inflation is a signal of wage inflation. To keep services inflation down the Reserve Bank (RBA) may yet have to push higher with interest rates.
The next two charts show goods v services and tradeables v non-tradeables. The pandemic was an unusual period where people couldn’t complain about cheap Chinese imports, because they weren’t cheap! But now normal service is resuming, with locally made non-tradeable goods like fresh bread growing in price quickly, and non-tradeable services (like haircuts) doing the same.
This suggests that inflation is not just something being imposed on us from abroad. It has spread its tendrils into the cracks in the Australian economy and is now putting down roots, which has to concern the RBA. The sole hope is that imported goods fall quickly enough in price to offset rising domestic prices and we can balance everything out with inflation back in the 2-3% range. It remains to be seen if that is realistic.
Another reason that the RBA might lift interest rates is rising house prices. The big banks were predicting house prices to fall this year, but in reality the bottom appears to be in and house prices are now heading up again, especially in the nation’s biggest market, Sydney. ANZ has changed its house price forecast to account for this, expecting price growth in the next eight months to compensate for price falls in the first four months, with the market ending the year flat.
For now, markets are not expecting further interest rate changes this year. Futures indicate the RBA will sit still with official rates at 3.6%. But if the price rises of Australian-made services continue to hold up, and if wages growth continues to drive them up, and if the housing market continues to warm up, the central bank will have no choice but to whack the whole economy with another round of rate rises and cool everything back down.
Stop calling it inflation. It’s NOT inflation and calling it that feeds into the narrative that if they can somehow remove enough money from people via interest rates and mortgages, that they can “put a lid on it”. And that’s garbage. The “inflation” figure itself is garbage. Firstly it assumes that the basket of things they use to calculate this so called inflation is somehow representative of the average Aussie. it’s not, not any more. Electricity price rises were the initial rippling out trigger – being held to unchecked ransom by the gas and fuel companies taking super profits overseas because of the Russian Ukraine war, followed hot on their heels by rate and mortgage rises that were literally caused by the reserve bank that have caused an explosion in rents too. In the same day that they crow about annual “inflation” dropping to 7%, frozen vegetables almost doubled in price at the supermarket. There’s no correlation whatsoever between the what the average Aussie spends his or her money on and this basket of goods that they base the so called inflation rate on. I’d love to be wrong, but I don’t think that it’s coincidence that a shortage of labor meant that people were able to negotiate better wages for the first time in a long time and THEN the reserve bank adds its boot into the electricity price crisis and the reserve bank themselves are driving this so called inflation. I might be wrong, but this looks to me like a straight out cynical reorganization of wealth back to the big corporations – at the expense of the ordinary Australian. And I’d LOVE to be wrong.
So where were you when the RBA CUT rates FOURTEEN TIMES in a row?………….
Because the “government” refused to do anything about an economy they were deliberately destroying.
If Abbott and Co. had taken action instead of leaving it all to the RBA the house price bubble would never have been inflated in the first place.
Causa causandis.
What you are reaping now was directly caused by the blind ideology of the LNP, NOT the RBA.
House prices rising?
Quelle surprise. That’s the whole idea isn’t it?
You don’t invite the largest number of newcomers in Australia’s history without hoping for something in return. Let’s drop the “skills shortages” pantomime which has been running since the first IGR almost 20 years ago.
Clearly the government has decided there are no votes in worrying about homelessness or unaffordable housing.
Or the jobless.
Bunch of neoliberal sellouts.
Or the government could start doing stuff with our own resources. Stop sending dirt overseas and value add here for gods sake. We are the luckiest country in the world in terms of resources, including a highly educated population, but we insist on a third world economy based on sending dirt and un-value added agricultural goods overseas. Its pretty much a crime against the Australian people.
It’s habit instilled in us from the days when shipping manufactured goods to Europe or America, and staying commercially viable, was impossible. But the internet and container ships and air freight should have changed all that by now. Don’t blame the government, blame the lack of entrepreneurs.
We export iron ore and coal overseas to be transformed into steel. Why can’t we produce steel in Australia and ship that. Shipping costs would be a lot cheaper. And holy Bat S**t Robin we have millions of acres of land being wraped in sunlight so we could use Solar Power. Don’t mention this to a politician as they will have to come up with an excuse of why not to do it. What about that big uninhabitable area in SA which is uninhabitable because of our former master now our AUKUS partner tested their nukes there. Ideal to cover with solar panels.
It can be done and don’t make me produce a Risk Assessment and Safety Procedures Manual for working in such areas unless you are serious.
More gaslighting of workers. None of businesses who charge high prices for services.
I fought all last year to keep the cost of the health service I provide the same, but eventually when the cost of everything including rent goes up, you have no choice to put up prices.
This is why increased inflation hits small businesses hard and many have to close – Do you put up prices to counteract cost of living and doing business but risk losing clientele because of it, or risk going under with the decreased revenue and increased costs?
At a rough guess I’d say my turnover will be down 25% from last financial year.