Australia's inflation 'problem' eases

Inflation easing

3 charts from Gareth Aird of CBA, demonstrating how Australia's inflation 'problem' is not getting worse.

Interestingly, Westpac has downgraded its inflation forecast for next quarter all the way down to 0.7 per cent, partly due to energy rebates in September (although the trimmed mean reading is still expected to be 1.5 per cent). 

CBA is still expecting 1.6 per cent headline inflation, but even that result would be lower than the preceding two quarters.

Of course, we still haven't seen the full impact of the 225 basis points of interest rate hikes delivered to date, so there will be further declines ahead too.

Source: CBA

Punters aplenty are making a big deal about the Aussie dollar trading at 65 cents against the US dollar, and the potential impact of this on inflation. 

However, Aird notes that the Aussie dollar has held up just fine on a trade-weighted basis, so there will be minimal impact on imported inflation.

A neat graph from CBA shows manufacturing supplier delivery times and work backlogs also easing, following some big spikes last year. 

And globally supply chain pressures continue to ease, with the container index now in a beautiful freefall. 

Indeed, supply chains easing will become a strong deflationary force next year. 

Overall, Aird's point appears to be that there has been a lot of monetary tightening delivered very quickly already, the impacts of which have yet to flow through, so it's time to throttle back to 25 basis points next month and take stock of the situation.

Inflation to ease over time

In short, supply shocks delivered a nasty spike in inflation, but in real time we're through the worst of it now. 

Fuel price inflation soared alarmingly to 43 per cent over the year to June, but over time annual inflation from fuel prices will naturally now ease its way back to zero (and below).

New dwelling purchase inflation peaked at a punishing 22 per cent in July, but annual inflation in this sector is now also on its way back down to zero as the building boom goes into reverse gear, and as materials become more readily available. 

Fruit and vegetable prices spiked in recent months following the destructive floods in some parts of eastern Australia, with annual inflation peaking at 19 per cent in July...yet now we have an abundance of supply and prices have dropped right back across all manner of produce. 

Going forward the main ongoing inflation pressures are likely to be seen in utilities and rents - with the government floundering on both of these fronts - but overall Australia doesn't have a major inflation or wages spiral problem. 

Indeed, as immigration hits a record high next year, we'll be back to moaning about low wages growth again soon enough.