Why Australia’s inflation isn’t as bad as you may think

I know inflation is probably on your mind.

In fact, it has a lot of property investors and homeowners worried.

And I can understand why.

Most Aussies have never experienced rising inflation or periods or rising interest rates.

But it may be worth taking solace in the fact that Australia has avoided the worst of the global economic downturn.

In fact, Reserve Bank chief Philip Lowe recently said: "I wouldn't want to trade our place for anybody else's". 

This came after his trip to the United States in October as he concluded that our economy isn't actually all that bad.

He does have a point.

He explained that while Australian inflation here has hit a 32-year high and complaining about energy, petrol and power bills, some European cities staring down rolling blackouts.

And while interest rates have risen sharply in Australia in response to soaring inflation, they have gone up slower and by less than many overseas countries.

Inflation

The most recent inflation figures came in higher than many commentators expected, increasing by 1.8 per cent in Q3, following on from a similar increase in the June quarter.

Over the year, consumer price inflation increased to 7.3 per cent.

However, the pace of price growth is slowing and is likely to have peaked and it seems that we’re not heading for the same wages / prices spiral as the USA and UK, which means we won’t have to raise interest rates as high as other countries.

However, the pace of price growth is slowing and is likely to have peaked and it seems that we’re not heading for the same wages / prices spiral as the USA and UK, which means we won’t have to raise interest rates as high as other countries.

In other words, our inflation is being driven more by lack of supply meeting the needs of extra demand creating “goods Inflations”

Services inflation (which rises because of higher wages) is more under control.

In an insightful article in The New Daily, Mathew Elmas summarised the situation well.

He presents this chart showing how Australian inflation compares to other countries.

Elmas quotes APAC economist Callam Pickering who says Australia’s growth prospects are much better than other nations, where a recession is much more likely. 

“The expectation over the next year or two is that economic growth across Europe and the United States is going to slow significantly, with heightened recessionary risks.

But in Australia we’re going to experience a more mild downturn.”

The reason Australia’s growth and inflation outlook is better than it is overseas is two-fold, and both factors have a lot to do with location:

• Europe and the US are more exposed to the economic fallout of the war in Ukraine, particularly when it comes to energy and global food prices.
• Meanwhile, Australia is much closer to Asia, a region populated with the strongest growing countries in the world such as China and India.

And even though growth rates among these key trading partners have slowed lately, it’s still several times higher than in the US and Europe.

Interest rates

Another benefit of lower inflation in Australia has been that the Reserve Bank hasn’t been as aggressive with interest rate hikes as central banks in the US and UK.

In spite of the seven rate rises in a row since May being record-breaking, the shock in Australia has not been as sharp as it has been for mortgage payers overseas.

Actually, Australians are also being spared the worst of rate hikes because we tend to take on more variable rate loans than homeowners elsewhere, which Mr Pickering said means the RBA gets more bang for its buck.

This is because a larger proportion of Australian homeowners feel the impact of rate hikes when they happen, meaning we need less of them.

Inflation expectations

In its recent Statement of Monetary Policy, the RBA believes inflation will remain above its target band of 2 - 3% until 2025.

This contrasts with the more aggressive approach of other central banks and suggests that they will not raise interest rates aggressively, however, there will be a few more rate rises ahead.

Wages

In his column, Elmas explains that if there's one area where Australia is performing worse than other comparable nations, however, is wage growth.

Obviously, Australia’s industrial relations system is heavily regulated, and so it takes quite some time for job market conditions to be reflected in wages.

This is the big reason why our wage growth has failed to keep up with the pace of inflation, despite bosses finding it really hard to find staff.

Real wages (a measure of purchasing power) have plunged at a record rate in Australia in the past six months as inflation has soared.

On the contrary, even though inflation is much higher in the US, growth in wages has generally kept pace.

The same can be said for the UK.

However, there is still a silver lining here.

As Dr Lowe said, "lower wages growth in Australia is also helping to keep inflation lower."

This is because when businesses have lower payroll costs they’re under less pressure to increase prices (which could then drive wages higher).

Source of charts and some commentary: The New Daily 

About Michael Yardney Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.