Inflation is at its Highest: What’s Driving It?

Concerns were raised as Australia's annual Consumer Price Index (CPI) climbed dramatically during the second quarter of the year. The event presented the risk of stagflation, an economic notion first encountered in the 1970s combining slow growth with high inflation.

According to the Australian Bureau of Statistics (ABS), the annual CPI jumped to 6.1% year-over-year in June. The increase was brought on by expensive new real estate property purchases, high moving gasoline prices, and costly furniture.

What are the Primary Drivers of Inflation?

The June inflation at 1.8 per cent quarter-on-quarter is slightly lower than the 2.1 per cent increase in the last quarter. However, the annual CPI reached 5.1 per cent in the last quarter, which is the fastest increase rate in over 21 years.

The rate released in June is the highest annual CPI rate since June 2001, when inflation reached 6.1 per cent. In December 1990, a higher inflation rate was recorded at a staggering annual rate of 6.9 per cent.

The three primary drivers of the sharp increase in the inflation rate are the following:

• New owner-occupied property purchases increased to 5.6 per cent quarter-on-quarter in June. This is due to expensive freight costs, a limited supply of building supplies and labour, and high levels of construction activities. Another factor that contributed to its rise is the fewer grant payments from the HomeBuilder program and other government and state-based housing construction grants.
• The volatile costs of fuel also influenced the inflation rate. Fuel costs rose up to 4.2 per cent in the previous quarter due to the global sanctions that were imposed upon the oil produced by Russia. The lifting of the strictest COVID-19 restrictions also increased fuel demand.
• Due to the increase in manufacturing and transport costs, prices of furniture also increased by 7.0 per cent quarter-on-quarter.

Philip Lowe, governor of the Reserve Bank of Australia (RBA), predicts that inflation may reach as high as 7.0 per cent by the end of 2022.

The national target inflation rate is 2 to 3 per cent on average. When the inflation rate is maintained at these levels, price stability and steady economic growth are achieved. This Australian monetary policy was first introduced in the early 1990s.

Is the Risk of Stagflation High?

Jerome Haegeli, a chief economist of Swiss Re Group, said that Australians should be wary that stagflation is back on the economic radar after five decades.

Stagflation brings with it a shrinking economy, along with high unemployment rates and a flying inflation rate. The world experienced all these in the 1970s.

So, what caused the stagflation then? First, the Organisation of Petroleum Exporting Countries or OPEC’s Arab state members restricted the global market’s supply of oil. The action resulted in a commodity price shock.

It was a form of protest against the support that the United States gave Israel during the Yom Kippur War. The world economies, including the U.S. and Australia, went through inflation and recession, hence the stagflation.

To counter stagflation, Australia’s policymakers created a new fiscal plan in the 1980s. The new plan tolerated higher rates of unemployment. Before the 1970s, the unemployment rate in Australia averaged 2 per cent since the mid-1940s. During the stagflation, unemployment levels increased, and it actually aided in combating inflation.

In June 2022, Australia’s unemployment rate lowered to 3.5 per cent. This is the lowest unemployment rate in 48 years. If the rate rises, it will not be as concerning as in the previous decades and may help curb the rising inflation.

It’s unlikely that Australia will experience immediate stagflation. However, it is a concerning possibility that Australians will see some of its elements shortly. The country’s economic situation has changed since the 70s. The government is better equipped to deal with global economic disturbances, such as the current invasion of Russia in Ukraine and the COVID-19 pandemic.

RBA governor Phillip Lowe said that people tend to push commodity prices and wages up as inflation persists. The process can result in a repeating cycle, where higher rates of inflation result in higher prices and larger wages.

The RBA declared its commitment to ensuring that the higher inflation rates are only temporary. It promises to bring inflation back to its target range.

Australia may be on the brink of an economic crash. Market analysts predict that the country will undergo a mild recession in the later parts of 2023. People are encouraged to have their finances under control to better prepare for any possible economic drop.

Inflation currently affects Australian finances, from food prices to home loan interest rates. If your home loan rates are becoming unbearable, it is a good idea to check and compare available refinancing options.

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