All Eyes on RBA as Inflation Hits 7.8%
The ABS consumer price index rose by 1.9 per cent in the three months to December 2022, versus 1.8 per cent in the previous quarter of 2022.
The biggest contributors to inflation in that December-ending quarter of 2022 were directly related to a 13 per cent jump in travel and accommodation relating to holidays, while simultaneously electricity prices jumped by 8.6 per cent in the same quarter.
Leading into today’s CPI reading, financial markets were pricing in a 40 per cent probability of a rate hike from 3.1 per cent to 3.35 per cent when the Reserve Bank (RBA) board meets on February 7, 2023.
All eyes will be on the RBA on that first Tuesday of February as the stronger than anticipated final inflation reading for 2022 suggests that a rate hike next month is now more likely.
Consumer prices are growing at their fastest pace since 1990, when inflation peaked at 8.7 per cent at the start of that decade, according to ABS data.
What are the ramifications of inflation rising and what do central banks do in response and how does it fix it?
Inflation is a measure of the rate at which the general level of prices for goods and services is rising and subsequently purchasing power is falling. Inflation rising can have a number of ramifications for an economy.
One of the main concerns with rising inflation is that it can lead to a decrease in consumer spending. As prices for goods and services rise, consumers have less money to spend on other items. This can lead to a slowdown in economic growth, as consumer spending is a key driver of economic activity.
Another concern with rising inflation is that it can lead to increased uncertainty and volatility in financial markets. When inflation is rising, investors may become nervous about the value of their investments, leading to increased selling pressure and a decrease in stock prices. This can lead to a decrease in business investment, as businesses may be less likely to invest in new projects when they are uncertain about the future.
Central banks, such as the Federal Reserve in the United States, have a number of tools at their disposal to respond to rising inflation. One of the most common tools is increasing interest rates. By raising interest rates, central banks can make borrowing more expensive, which can help to slow down economic activity and reduce inflation.
Another tool that central banks can use is quantitative easing. This is a policy where the central bank purchases government bonds or other securities from banks in order to increase the money supply. This can help to stimulate economic activity and reduce unemployment, but it can also lead to higher inflation if not done correctly.
Central banks also have tools to target inflation directly. For example, in some countries central banks have an inflation target, and they adjust monetary policy to meet that target.
In order to fix rising inflation, central banks may also implement a combination of these tools. For example, they may raise interest rates while also implementing quantitative easing in order to try to balance the effects of both policies.
In summary, rising inflation can have significant ramifications for an economy, including decreasing consumer spending, increased uncertainty and volatility in financial markets. Central banks respond to inflation by adjusting interest rates and implementing monetary policy, such as quantitative easing. The central bank can use combination of these tools to try to fix rising inflation, but it's not a easy task and it's not always successful.
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