27 May 2022 17:13
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Early interest rate rise a certainty amid rapidly evolving inflation

Economists expect annual inflation could reach as high as five per cent compared with 3.5 per cent now.

The Reserve Bank of Australia has warned there are uncertainties about how persistent the pick-up in inflation will be given recent developments in global energy markets and ongoing supply chain problems. 

In the minutes of its March 1 board meeting, the RBA said underlying inflation was expected to increase further over coming quarters before moderating as supply chain problems are resolved. 

“However, the war in Ukraine and the associated increase in energy prices had created additional uncertainty about the inflation outlook,” the minutes released on Tuesday said.

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The board stuck to the script of being patient before lifting the cash rate as it monitors how the various factors affecting inflation in Australia evolve.

Still, RBA governor Philip Lowe warned at a business conference last week the annual rate of inflation could reach at least four per cent and a rate rise this year was plausible.

Reserve Bank Of Australia; Picture Source: @CANVA
Reserve Bank Of Australia; Picture Source: @CANVA

Some economists expect annual inflation could reach as high as five per cent compared with 3.5 per cent now.

Consumers are already feeling the pinch from petrol prices rising to more than $2 a litre, pushing inflation expectations having jumped to a near 10-year high.

The weekly ANZ-Roy Morgan consumer survey found inflation expectations rising by 0.4 percentage points to 5.6 per cent, its highest level since November 2012.

Inflation expectations can in themselves create price pressures as workers chase higher wages as compensation.

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The impact on household budgets from record petrol prices has also seen consumer confidence tumble 4.3 per cent in the past week to 95.8, its lowest level since October 2020.

“Households are certainly noticing the effect of higher prices on their finances,” ANZ head of Australian economics David Plank said.

The recent spike in global crude oil prices to around $US130 per barrel as a result of Russia’s invasion of Ukraine could see further rises in petrol prices in the short term.

However, oil prices were heading back down towards $US100 a barrel on Monday.

“If the recent fall in oil prices is sustained, we would expect inflation expectations to ease,” Mr Plank said.

Meanwhile, Australia’s manufacturing industry has perked up as a result of COVID-19 restrictions easing, although the sector is still suffering labour and material shortages.

The Australian Chamber of Commerce and Industry-Westpac survey of industrial trends survey found business conditions in manufacturing improved moderately in the early stages of 2022.

Image source: Big Four OZ banks - Wikipedia.
Image source: Big Four OZ banks – Wikipedia.

Its composite index rose into expansionary territory to 56.7 points in the March quarter after the flat 50.8 result in the December quarter. 

“Consumers have embraced fewer restrictions, spending more freely, providing a boost to manufacturers,” Westpac senior economist Andrew Hanlan said.

However, the sector’s current growth pace is well below the brisk expansion experienced during 2017 and 2018 when the home-building sector was in a strong upswing. 

ACCI chief executive Andrew McKellar said while manufacturing remained resilient in spite of the Omicron surge, expectations have been dampened by the continued volatility in the global economy.

“International supply chain bottlenecks are producing material constraints on a scale not seen in almost 50 years,” Mr McKellar said.

“With the costs of inputs increasing at a much faster rate than prices, the Russian invasion of Ukraine and soaring commodity prices will undoubtedly lead to further pressure on manufacturers who are already being squeezed.”

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