Despite Australia’s soaring inflation rate, some economists say the peak may be ‘coming into view’

by Peter Hannam
Analysis: Inflation optimists look to falling global supply chain pressures but spiking energy prices suggest we haven’t reached a plateau yet

Some economists have tipped that the inflation rate has started to plateau, even after the Australian consumer price index on Wednesday showed the fastest annual pace of inflation since 2001.

Australian prices rose 6.1% in the June quarter, the quickest pace in 21 years. Yet even in that dire news from the Australian Bureau of Statistics, some economists were able to spy a silver lining.

KPMG’s chief economist, Brendan Rynne, is one of the inflation optimists. He said that while pricing pressures affected a broader section of the economy, the CPI had actually eased to 1.8% from a 2.1% pace in the March quarter.

“When considered against the backdrop of falling global supply chain pressures, it is possible that we are starting to see the peak of inflation coming into view,” Rynne said.

It’s a big call and one that the treasurer, Jim Chalmers, isn’t ready to make. “Inflation will get worse before it gets better, but it will get better,” he said.

Predicting inflation is a mugs’ game. Ask the Reserve Bank of Australia governor, Philip Lowe, who was still preaching “patience” on lifting interest rates until 2024 when other central banks had already strapped on their hiking gear.

In mid-December Lowe was still confident the “situation here in Australia is quite different” from elsewhere. Electricity and gas prices had been falling and wage growth remained “relatively low”.

In that speech to accountants in Wagga Wagga, inflation did not get a mention until Lowe’s 13th chart. Today he would probably have teed off with a CPI comment, given the attention given to inflation and what it might mean for official interest rates.

As the International Monetary Fund highlighted in its latest global economic outlook, released overnight, the world is facing “an increasingly gloomy and uncertain outlook”.

Russia’s invasion of Ukraine is one of the unpredictable factors troubling the IMF. How much Moscow limits gas exports to Europe or deliberately disrupts Ukraine’s grain exports could have profound impacts on fuel and food prices – and unless you are in the Kremlin, those variables are unknowable and already among the main drivers of the spike in global inflation.

Workers campaigning for higher pay will play a role in charting the course of inflation in many countries, the IMF said. Those demands are not unreasonable given wages have typically lagged price rises.

Tight labour markets – including in Australia, where the jobless rate is the lowest in 48 years at 3.5% – mean employees have more bargaining power than they have had for a generation.

The Australian Council of Trade Unions (ACTU) wasted no time on Wednesday reminding the Labor government that it is high time workers got a look in. In the last year, an employee on an average annual income of $69,000 will have experienced a $2,350 pay cut because their salary packet hasn’t kept up with prices, the peak union body said.

“The need to get wages moving again is urgent,” the ACTU president, Michele O’Neil, said. “Business as usual will not turn this around; it will not fix this.”

The quirky way Australia releases inflation data also masks some of the buildup in pricing pressure.

Unlike most comparable nations, Australia only releases quarterly statistics on prices, which the ABS is moving to change to monthly disclosures. Wages also land quarterly, with the June quarter wage price index not due out until 17 August.

Other reasons to wonder if prices rises are about to ease lie on the energy front.

The 22.1 cent fuel excise cut, which was unveiled as a pre-election cost-of-living measure by the Morrison government, expires on 28 September. Chalmers said there “hasn’t been a day” he hasn’t thought about ways to extend the $3bn measure, but has shown no sign of doing so.

Electricity and gas price spikes in recent months – mostly caused by failing coal-fired power plants triggering the use of super-expensive gas to generate power – will also stoke inflation.

The Commonwealth Banksaid: “Electricity and gas prices will rise over the 2022/23 financial year as wholesale prices have risen strongly and as regulators have announced lifts in the default market offer price.”

Electricity prices were flat in the June quarter, but the Australian Energy Market Operator will release a market report on Friday that will probably show a big rise in wholesale energy prices compared with the March quarter.

Dylan McConnell, a researcher at the University of Melbourne, says the June quarter volume-weighted price for power in the national electricity market serving eastern Australia was just above the $300/Mwh rate.

But that fare excluded a whole slew of payments during the recent energy shortages that will eventually land with consumers.

So, be wary in pencilling in a price plateau. We may have a way to climb just yet.