Inflation pressures cooling Down Under
There's been a bit of chat about Australia having one of the highest inflation rates among developed economies.
In reality, we're on a pretty similar trajectory to many other countries, but since inflation is only published quarterly this probably won't become fully apparent until next year.
Gareth Aird of CBA put out a note (which you can track down on LinkedIn) explaining how interest rates are by and large doing their job, with the Reserve Bank of Australia set to stay on hold until February 2024, and probably beyond that too.
Let's step through a few of his key points.
Firstly the unemployment rate bottomed out more than a year ago and has been trending higher over the past 12 months, rising to 3.7 per cent in October.
Other surveys suggest a large lift in underemployment.
The wages figures released last week weren't out of whack with market expectations, which keeps the overall narrative a calm one, with the increases in Q3 largely related to the one-off minimum wages lift.
Charting gun Economist Justin Fabo highlights how once the unemployment rate hits a trough in Australia (and the US), it's usually not too long before the interest rate cuts follow:
Source: Justin Fabo
NAB's Business Survey for October showed that price pressures are now steadily easing - including for labour costs - while JudoBank's monthly PMI gauges for Australia revealed a very similar pattern.
Source: NAB Survey
Although the ABS only reports inflation quarterly, the Melbourne Institute's monthly inflation gauge has gone all but nowhere for 3 months now, with petrol price and possibly rental price inflation set to ease from here (with the Commonwealth Rent Assistance Scheme potentially curtailing the rents component in the inflation figures).
Indebted here to Dr Alex Joiner of IFM Investors here for the graphs!
Source: Melbourne Institute/Alex Joiner, IFM
So while we've been shooting a little above the Reserve Bank's previous forecasts for core inflation, we're broadly speaking on track.
It shouldn't be overlooked that the interest rate hikes delivered to date are creating a good deal of household financial stress, with still more mortgages yet to reset higher from very low fixed rates.
Almost all of the leading indicators for dwelling construction ahead have collapsed, so housing development will also likely slow in 2024, taking at least some of the previously chronic price pressures off trades and materials which have pumped new dwelling costs to the sky.
J. Fabo pointed out at the cumulative inflation in Australia since early 2020 has been lower than the US, UK, New Zealand, and the EuroZone, in spite of the relatively lower cash rate target here.
Source: Justin Fabo
It's actually an interesting hypothetical question as to how much all this might've played out without all the dramatic increases in interest rates...but alas we'll never know the answer to that one!
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