INTHEBLACK November 2021 - Magazine - Page 19
MEET THE
EXPERTS
03
02
J O M AS T E R S
B R E N D A N C O AT E S
C H I E F E C O N O M I S T,
EY OCEANIA
ECONOMIC POLICY PROGRAM DIRECTOR,
G R AT TA N I N S T I T U T E
Inflation is back – well, at least talking about it is.
Headline inflation rose by 3.25 per cent in the year
to June. There is undoubtedly asset price inflation
(yes, the housing market), commodity and
producer price inflation.
However, will this translate into sustained,
generalised consumer price inflation? Never say
never, but I think it’s transitory, and here’s why.
Underlying inflation was just 1.6 per cent in the June
quarter. Some of the price pressures we are seeing
reflect base effects, but, more importantly, ongoing
global supply chain dislocation, combined with
government policies, have spruiked demand – the
cost of renovating a home or buying a second-hand
car, for example. These markets will adjust in time,
leaving a disinflationary pulse, particularly if the
Australian dollar continues to appreciate.
Economic modelling shows that the key
determinant of inflation is spare capacity in the
labour market and wages growth. The jobs recovery
has been strong, and the unemployment rate has
fallen to 4.9 per cent. However, that is above full
employment, which is likely in the low fours, and
annual wages growth is just 1.5 per cent. The rule of
thumb is that wage growth needs to be 3.5 per cent
for inflation to be at 2.5 per cent, the mid-point of
the Reserve Bank of Australia’s target. Even with a
doubling of wage growth, the outlook is not one of
runaway inflationary pressures, and lockdowns have
seriously dented the economic recovery.
What if I’m wrong? Well, policymakers are very
good at tempering too-high inflation, and it would
give central banks the opportunity to lift the cash
rate off the floor, which is not such a bad thing.
Prices have been flatlining for years, but now
there is talk that inflation is back. How worried
should we be?
There is little doubt we’ll see a spurt of inflation
in the short term. The Reserve Bank of Australia
(RBA) expects inflation to hit 3.25 per cent for
the year to June. Inflation in the US rocketed
back to 5.4 per cent in the year to June 2021.
However, a lot of that inflation will be
temporary. Supply bottlenecks that emerged as
the global economy opened up will ease in the
coming months. In the depths of the pandemic
panic last year, Australia’s Consumer Price Index
actually fell by 1.9 per cent in the June quarter.
A lot of inflation reported now simply reflects
those past price falls.
Sustained inflation is really only a risk when
rising prices get factored into firms’ and workers’
expectations, but inflation expectations remain
subdued, so it’s hard to be worried.
It is hard to see inflation expectations rising
after inflation has persistently undershot the
RBA’s inflation target band of 2 per cent to 3 per
cent a year for half a decade. Market economists
– according to the RBA’s own survey – appear to
agree. They expect inflation two years from now to
be just 2 per cent. Union officials are more
pessimistic.
After years where inflation has undershot,
rising inflation would be among the best signs
yet that Australia is exiting the economic funk it
has endured for much of the past decade. Having
missed its inflation target for much of the past
decade, the RBA would probably agree.
_
Some of the price pressures we are seeing reflect base
effects, but, more importantly, ongoing global supply
chain dislocation, combined with government policies,
have spruiked demand...Markets will adjust in time,
leaving a disinflationary pulse, particularly if the
Australian dollar continues to appreciate.
_
Sustained inflation is really only a risk when
rising prices get factored into firms’ and
workers’ expectations, but inflation
expectations remain subdued, so it’s hard
to be worried.
SU-LIN ONG
Su-Lin Ong is chief
economist and managing
director with RBC Capital
Markets. Prior to joining
RBC in 1998, Ong was a
fixed-income economist for
Hambros Bank, and before
that worked as an economic
adviser at the Department of
Prime Minister and Cabinet.
She has recently joined the
Committee for Economic
Development of Australia’s
economic policy committee
and appointed to the Women
in Banking and Finance board.
JO MASTERS
As the chief economist for
EY Oceania, Jo Masters is
passionate about driving
discussions around the
traditional and disruptive
forces that shape the
economy. Her involvement
in the banking sector has
focused on economic
research and trends, and
currency strategy. Masters
sits on the advisory
committee for the Financy
Women’s Index and teaches
Economics 101 to SheStarts,
an accelerator program for
female entrepreneurs.
BRENDAN COATES
Brendan Coates is economic
policy program director at
the Grattan Institute, where
he leads work on tax and
transfer system reform,
retirement incomes and
superannuation, housing,
macroeconomics and
migration. He is a former
macro-financial economist
with the World Bank in
Indonesia, as well as a former
Australian Treasury official.
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