Inflation has been stalking Australians for a while now but it is no longer a secret with flying petrol and diesel prices hitting the back pocket of everybody.
And while the direct cost is being felt at the bowser, it won’t be long until higher fuel costs filter through to most transactions, including the supermarket and services as well.
One of the few banks willing to punt on how high inflation will go is ANZ (ASX: ANZ), which has now forecast it to hit as much as 5% this year, slashing purchasing power for millions of Australians.
Adding to that pain, ANZ is throwing in a forecast for continuing low wage growth and interest rate hikes, which would exacerbate the pain in the wallet.
Higher prices came through COVID-19, floods and Ukraine war
The inflationary pressures began with the COVID-19 supply chain disruptions but now they are being added to by floods and the war in the Ukraine – setting the scene for a very interesting campaign for the Federal Election.
“We see headline inflation approaching 5% by mid-2022 as the impact of higher petrol and food prices flows through,’’ said the ANZ report.
“While this spike is not unexpected, as the RBA noted in recent commentary, it increases the peak and duration of higher inflation.”
The last time inflation hit those levels was way back in September, 2008 – during the global financial crisis – although at that time rising wages cushioned the blow somewhat.
Higher prices a shock after low inflation era
For many who have been brought up in an era of very low inflation, this new burst could come as a big shock as the real purchasing power of wages is eroded and household wealth and purchasing power goes backwards.
In some ways it is a bit like the super low interest rates and big government stimulus giveaways of the last couple of years are about to be swallowed up in higher prices.
Rising prices would also stimulate a war of further giveaways in the Federal Election, with the coming March Budget now almost certain to contain some sweeteners such as tax cuts or payments designed to make it look like households are getting some relief from price pressures.
Will inflation psychology worsen the damage?
The ANZ report reminded us that the Reserve Bank of Australia (RBA) has previously spoken about inflation psychology – something that happens when people become so accustomed to the idea of rising prices that they become something of a self-fulfilling prophecy.
If this shift in inflationary thinking happens then any further supply shock will keep feeding inflation and higher inflation would become much more entrenched and tougher to get rid of.
This is particularly the case in Australia because much of the current inflationary pressures – including higher fuel prices – have been imported but they will also start to feed into further inflation on a local level.
For the time being these price rises have not been followed up by rises in interest rates, although that could well happen – particularly if even faster rising inflation in the US is pursued by rising rates.
RBA promise to hang tough but higher rates are coming
RBA governor Dr Philip Lowe has explicitly said he is not feeling pressured to raise rates due to the large number of pundits predicting higher rates, although he did warn that people should be prepared for higher rates in the future.
“I don’t feel mounting pressure. We do what we think is the right thing at each of our meetings, so the pressure, it’s great for media stories, but I don’t feel that myself,” Dr Lowe said.
It will be a different matter if domestic inflationary pressures build up more strongly than expected.
The US situation is instructive with inflation hitting 7.9% annualised last week with some expecting that to rise to 9% in coming months as fuel prices ratchet through supply chains.
If the US raises rates above Australia’s that could lead to a situation in which our dollar comes under pressure, which might give the RBA cause not to open up too much of a disconnect to interest rates in other advanced countries.
