Grim warnings of a US-style inflationary surge in Australia – with a consequent rise in home loan rates – ignore key differences between the two economies.
Breathless commentators have been quick to conclude that the surge in US inflation – which dashed to an annual rate of 7 per cent in December, the fastest pace clip in nearly four decades – will inevitably spread to Australia.
to combat rampant inflation which, of course, means that banks will lift their home loan rates.But more measured observers believe that these grim prophesies of rampant inflation and rising interest rates are premature. After all, Australia’s underlying inflation rate was 2.1 per cent in the year to September 30 – only just managing to claw its way back within the Reserve Bank’s inflation target band for the first time in six years.What’s more, they point out there are some key differences between what we’re seeing in Australia, and what’s playing out in countries such as the United States and United Kingdom . In the first place, the starting position is extremely different. Unlike the US, the coronavirus pandemic hit the Australian economy at a time when both inflation and wages growth were at extremely low levels What’s more, unlike the US, where average hourly wages were up 4.7 per cent in December from a year earlier, there’s little indication far that wages growth in Australia is heating up.One reason for this could be the participation rate. In the United States, the participation rate tumbled to 61.9 per cent in December, well below its pre-pandemic level of 63.4 per cent. In contrast, Australia’s participation rate climbed to 66.1 per cent last November, just shy of a record high. And it’s likely that people’s clear willingness to re-enter the workforce is helping to ease the pressure on local wages.has drawn attention to is the inertia that is embedded in Australia’s wage-setting processes. As Lowe noted in a speech last month, “these processes include enterprise agreements that tend to only get renegotiated once every two to three years, the annual review of award wages by the Fair Work Commission and public sector wages policies.“In the first place, we haven’t seen the same sorts of jumps in the prices for new and used vehicles and rental charges that have helped drive the US inflationary surge. In the US, for instance, prices of used cars and trucks surged 37.3 per cent in December from a year earlier.– which make up roughly 40 per cent of US core consumer price inflation – that is propelling US inflation higher.Although both US and Australian house prices climbed by around 20 per cent last year – which added to rental demand by forcing some would-be home buyers out of the market and forcing them to rent for longer – it’s likely that the pressure on Australian rents was alleviated by net overseas migration outflows. Further, Australian electricity prices, which had been high, have fallen, in contrast to many overseas countries where electricity and gas prices have jumped sharply. All the same, there’s little doubt that, after a long period of inactivity, Australia’s inflation genie is beginning to stir, as global supply chain disruptions have forced consumers to pay higher prices for a range of goods. But it’s still far too early to worry that we’re in for anything like the inflation surge that’s occurring overseas. writes on banking and finance, specialising in financial services, private equity and investment banking. Karen is based in Sydney.
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