Australia's inflation rate is rising rapidly
Quick summary:
Australia’s inflation rate is rising rapidly — in the March quarter 2022, consumer prices are rising by 5.1 per cent in annual terms
Prices are rising across most sectors of the Australian economy, particularly for food, housing and transport
The Reserve Bank of Australia will being raising the cash rate to slow inflation and bring it back into the central bank’s inflation target band of 2 to 3 per cent over the course of the business cycle.
The Reserve Bank of Australia (RBA) has a target for Australia’s inflation rate of between 2 and 3 per cent. In the March quarter of 2022, Australia’s yearly inflation rate was 5.1 per cent.
“Australia, we have an inflation problem.”
What is inflation?
Inflation is a sustained increase in the general level of prices. The important point is “sustained”. We’re not looking for a one-off jump in prices. As economists, we’re looking for price rises that persist for a period of time.
The “sustained” part is crucial because we don’t want to change economic policy for temporary things. For example, if prices rise in one quarter, but fall the next, the RBA may not need to raise the cash rate. But if we see prices rise quarter after quarter, it may be time for a tightening of monetary policy (higher cash rates).
Are you wondering what inflation even is?
Check out my video.
How is inflation measured?
Every quarter the Australian Bureau of Statistics (ABS) publishes the Consumer Price Index (CPI). This measures the changes in prices for the types of goods and services that households spend most of their money on.
The ABS refers to this as a ‘basket of goods’. These goods and services are weighted based on their relative importance to households. This is because a rise in the price of certain goods and services would have more of an impact than others. For example, a rise in the price of food would be weighted more heavily (have more impact on the CPI) than a rise in the price of Prada sneakers.
Why? Because the sad truth is more households can afford food than Prada sneakers.
“The sad truth is more households can afford food than Prada sneakers.”
The ABS’ ‘basket’ covers eleven groups:
Food and non-alcoholic beverages
Alcohol and tobacco
Clothing and footwear
Housing
Furnishings, household equipment and services
Health
Transport
Communication
Recreation and culture
Education
Insurance and financial services
What happened to Australia’s inflation rate in the March quarter of 2022?
In late April, the ABS published the March quarter CPI. This covers January, February and March 2022.
Australia’s CPI rose by 2.1 per cent in the March quarter compared to the December quarter. By way of comparison, the CPI rose by 1.3 per cent in the December quarter of 2021 compared to the September quarter of 2021.
So: inflation is clearly on the way up.
Moreover, the annual rate of inflation has increased substantially. If we compare the March quarter of 2022 with the March quarter of 2021, the CPI has risen by 5.1 per cent.
Your quick summary of Australia’s complex inflation picture. You’re welcome.
Which prices are rising fastest in the Australian economy?
You can see the main contributors to the rising inflation rate in the graph below.
Let’s focus on a couple of the areas.
Food and non-alcoholic beverages (up by 2.8 per cent in the March quarter)
According to the ABS, prices across ALL food and non-food grocery products in the March quarter
This was due to the cost of COVID-related supply chain disruptions (reducing stock and pushing up prices), rising transport costs (related to the rising cost of fuel) and challenging weather conditions such as floods
Housing (up by 2.7 per cent in the March quarter)
Australia’s housing market was relatively strong in the quarter which led to higher prices for homes and rents
In addition, there are rising construction costs for new home builds and renovations. Builders are passing on these costs to home owners, resulting in rising prices
Transport (up by 4.2 per cent in the March quarter)
The price of petrol rose by 11 per cent due to the a spike in global oil prices following Russia’s invasion of Ukraine
Petrol prices have also risen as COVID-related travel restrictions have eased and people are demanding more fuel as they travel greater distances
Car prices have also been rising as supply chain disruptions have restricted the arrival of new cars into Australia (less supply combined with strong demand leads to higher prices)
Just look at this chart of how fast petrol prices have risen in the Australian economy. Businesses are passing these costs on to consumers; this then results in cost-push inflation.
Petrol prices are really pushing p…rices higher.
Headline versus underlying inflation
Australia’s headline inflation rate includes all prices changes in the economy. Australia’s underlying inflation rate excludes one-off or volatile price changes in the economy.
The RBA focuses on underlying inflation. This is because when the central is deciding whether or not to change the cash rate, it wants to respond to ongoing trends in the Australian economy and NOT one-off price shocks that might quickly dissipate.
The RBA looks at two measures of underlying inflation — the trimmed median and weighted mean. Don’t worry too much about what they’re called. Just know this: the RBA’s preferred measures of inflation show that Australia’s underlying inflation rate in the March quarter 2022 is around 3.45 per cent — above the central bank’s target band of 2 to 3 per cent.
What are the impacts of Australia’s rising inflation rate?
The key impact is that the cash rate will soon rise. This could happen as early as 2 May when the RBA holds its next board meeting to discuss the cash rate.
This means Australia’s monetary policy will have a contractionary stance and wil slow the level of economic growth.
At the same time, Australia’s fiscal policy — the federal budget — is still having a large expansionary impact on the Australian economy. Read about it here.