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US inflation at 40-year high: Will Australia follow?

Markets were rocked in the United States overnight after official inflation figures told an expensive story.

Inflation jumped 7.5 per cent in 12 months, the largest spike since 1982.

Despite being higher than anticipated, a rise in inflation was expected, with the US Federal Reserve already flagging interest rate hikes to cool rising prices.

Inflation has been rising globally, with many central banks raising rates or at least flagging future rate rises.

One central bank, though, has remained steadfast that inflationary pressures around the world are not the same in its country.

The Reserve Bank of Australia (RBA) is one of the few central banks brushing off inflation fears, insisting Australia’s economy is in a different position.

So, will we follow the US’s lead with a major jump in prices?

 

Why the RBA isn’t concerned

In his most recent statement on monetary policy, RBA governor Philip Lowe acknowledged that inflation in Australia had been rising faster than the bank expected.

However, Lowe said the bank was waiting for underlying inflation to stay within its target range of 2 to 3 per cent.

The term ‘underlying’ is important here.

Australia’s inflation target is expressed in terms of CPI inflation – known as ‘headline inflation’.

But, headline inflation can include large price changes that may be due to temporary factors, such as supply chain issues.

‘Underlying inflation’ excludes those factors to look at the more broad conditions in the economy.

“Inflation has picked up more quickly than the RBA had expected, but remains lower than in many other countries,” Lowe said in his most recent statement.

“The headline CPI inflation rate is 3.5 per cent and is being affected by higher petrol prices, higher prices for newly constructed homes and the disruptions to global supply chains. In underlying terms, inflation is 2.6 per cent.”

By contrast, inflation in the US just rose by 7.5 per cent.

The RBA believes underlying inflation in Australia will continue to rise over the next couple of quarters, but will then fall to 2.75 per cent over the course of next year.

This is because Lowe believes that, as supply chain issues resolve, prices will cool. Couple that with the improving economic conditions as the world emerges from COVID lockdowns and things don’t seem as dire.

Why others are concerned

Inflation is the measure of consumer prices – essentially the amount of money we all have to pay for goods and services.

And, it doesn’t take a genius to notice that prices are rising.

The cost of filling up your tank with petrol has never been higher for Aussies, and buying meat for the family BBQ has reached a 10-year high.

Sheep and lamb prices are currently around 50 per cent higher than the 10-year average, according to Meat and Livestock Australia.

These and other factors led to the annual rate of inflation rising by 3.5 per cent in the December quarter – the fastest rise since 2008.

It’s because of these issues that economists like Stephen Koukoulas have been insisting the RBA needs to raise rates.

“Given what we know about global inflation, local price pressures and the start of wages pick up, inflation will get even higher in 2022, staying above the RBA target of 2 to 3 per cent and forcing the hand of the RBA to hike interest rates,” Koukoulas recently wrote for Yahoo Finance.

On top of that, the Big Four banks also disagree with Lowe – with predictions for a rate rise as early as this year.

So, what will happen with Australian consumer prices?

Only time will tell and we will have to wait until 27 April for the next official inflation data to be released.

 

Article from: au.finance.yahoo.com