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Australia is experiencing record levels of inflation as a result of knock-on effects from the COVID-19 pandemic, Russia’s invasion of Ukraine and strong consumer demand.
In January, the ABS revealed that Australia’s inflation rate had risen 7.8% for the year to December—the highest level since 1990—while quarterly inflation was up by 1.9%.
The 7.8% figure was slightly higher than many economists’ forecasts of around 7.5%, however, was in line with Treasury estimations that inflation would peak around 8% by the end of 2022.
According to the ABS figures released on January 25, annual inflation for year to December was being driven by a steep rise in the cost of new dwellings, up 17.8%; domestic holidays, travel and accommodation, up 19.8%; and fuel costs, up 13.2%.
In October’s data, the ABS reported that Australia’s inflation rate had risen to 7.3% annually in the September quarter.
Like many of the world’s central banks, the RBA spent much of 2022 attempting to rein-in inflation with eight consecutive rate hikes. It is targetting an inflation range of between 2-3%.
On September 29, 2023, the ABS began to publish monthly data of inflation to give economists and politicians the most-up-to-date information on the levels of inflation in the economy and the impact, no doubt, of rising interest rates. The quarterly CPI will continue to be Australia’s key measure of inflation, as these new monthly data updates only record inflation on up to 70% of goods and services. “It should be noted that in contrast to the quarterly CPI which is only revised in exceptional circumstances, the monthly CPI indicator may be routinely subject to revision,” The Australian Bureau of Statistics said,.
With inflation at such high levels, the RBA has continued its aggressive streak of hiking rates. In his statement on monetary policy, RBA Governer Philip Lowe has said that “a further increase in inflation is expected over the months ahead, with inflation now forecast to peak at around 8% later this year”.
“Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand,” he said.
Most recently, Lowe issued a mea culpa of sorts stating: “I’m sorry that people listened to what we’ve said and acted on that, and now find themselves in a position they don’t want to don’t want to be in.” Lowe had previously stated that interest rates “would not likely rise until 2024”, with many people taking out large mortgages in the interim.
In Treasurer Jim Chalmer’s first Budget, he attempted to walk the line between providing cost-of-living relief, while curbing inflation. After the RBA’s most recent rate rise, Chalmers spoke of inflation as the “biggest challenge in the Australian economy”.
“Once again, Australia is outperforming much of the world, but that doesn’t make it easier to pay the bills at home,” Chalmers saind in a ministerial statement to Parliament.
“Left untreated, inflation which is too high for too long undermines living standards and jobs, and wrecks economies.
“But the medicine is also very tough to take—and millions of Australians with a mortgage are feeling that pain right now.”
Chalmers’ Budget also indicated that energy costs could rise by more than 50% next year, prompting calls for the Government to intervene in the gas and electricity market.
What is Causing the Inflation Rate to Rise?
Inflation is high in Australia due to a combination of factors. The economic recovery from the global recession caused by COVID-19 lockdowns has been stronger than expected, which is partly due to the government providing long-term emergency stimulus packages, such as the JobKeeper payments and HomeBuilder grants.
According to economist Saul Eslake, inflationary shocks are being felt acutely now because in the 20 years leading up to the pandemic, prices were mostly trending downwards. This was because the manufacturing of ‘big ticket items’ (known as consumer durable goods) were moved from the West to the developing world, where overheads are lower. Most people didn’t notice until prices shot up, because these big-ticket items are generally bought infrequently. When lockdowns were imposed, there was a dramatic surge in demand for products such as computers and home fitness equipment.
“People couldn’t go to the cinema, so they bought better entertainment equipment,” explains Eslake, who is also a company director and Vice-Chancellor’s Fellow at the University of Tasmania. “People were spending more time at home and decided to renovate. They didn’t want to catch public transport, so they bought cars. There was all this demand-shock and governments threw a lot of money at people, which meant that they could afford to buy these things.”
At the same time, the lockdowns caused factories to close virtually overnight, which led to supply shortages. Shipping costs surged by 400% because many ships were taken out of service. Russia’s invasion of Ukraine has put additional upward pressure on prices of oil and gas and many food items.
“If there were changes to either supply or demand, it wouldn’t be such a problem,” says Brendan Coates, economic policy program director at Grattan Institute. “It’s the combination of the two that has led to an extraordinary inflation impulse around the world, and increasingly in Australia.”
The Impact of Inflation on Everyday Australians
The higher costs of doing business have been passed onto customers, leaving everyday Australians materially worse off. The problem is exacerbated stagnant wages, which have been decreasing slightly or remaining the same for the past five years.
“Ordinary Australians are experiencing falls in their material living standards. In some cases, they’re having to make difficult choices about how they spend their money,” says Eslake.
Coates points out that living standards for the average Australian have fallen more in the past couple of years than they did during the Global Financial Crisis of 2007 to 2009.
“Real wages didn’t fall anywhere near as much then as they are now. In the year to March, real wages fell 2.7%. That’s the worst result in more than two decades,” says Coates.
For some people, the lack of opportunities to spend money during lockdowns helped them to accumulate considerable savings. Others saw their livelihoods and savings wiped out.
Australia’s Reserve Bank has responded to inflation in the same way as other central banks have around the world: by raising interest rates. This means that a higher proportion of incomes are going towards paying interest on mortgages.
“In Australia, most people are on variable rate mortgages, so they manage the inflation by tightening their belts and pulling back on discretionary spending,” says Coates.
The Reserve Bank is aiming to create a better balance between the supply and demand of goods and services, as higher interest rates will slow down the economy. The interest rate hikes will be felt most by marginal borrowers, who Coates estimates account for roughly one-third of new loans.
“As harsh as it sounds, there’s no easy way around the short-term pain that people are feeling until the high inflation is brought down,” says Eslake.
Where is Inflation Headed?
The International Monetary Fund (IMF) expected global inflation to reach 8.3% by the year’s end, which presents a high risk of recessions in the European Union and the US.
“The central banks in those jurisdictions are worried and have really turned the screws. They raised interest rates sharply to take the heat out of inflation,” says Coates.
However, Eslake is encouraged that there is already some evidence that US households are not expecting inflation to become a permanent feature of life.
“The thing that most scares the central bank is the prospect of an inflationary psychology becoming entrenched as it did in the 1970s and ’80s,” he says. “If people and businesses regard inflation as a fact of life, they’ll start raising prices in anticipation of cost increases. And that makes it a self-fulfilling prophecy.”
In Australia, the federal government and Reserve Bank have forecast that inflation will peak at 7.75% in the December quarter of 2022. Inflation is expected to start falling from next year and continue through 2024. Workers will begin to see real salary increases from next year.
Of course, nothing is certain. The geopolitical landscape is fraught with tension. Observers are watching China’s postures over Taiwan with concern. Russian President Vladimir Putin could retaliate to European sanctions by hampering the supply of gas during the upcoming winter, which would put renewed upward pressure on commodity prices.
Even so, Coates remains somewhat optimistic about Australia’s economic outlook:
“Australia is insulated to a degree from this, because we happen to export a lot of the things that are in short supply globally. That tends to leave us in a better position than we otherwise would be.”
Frequently Asked Questions (FAQs)
What causes inflation?
Inflation refers to the process of goods and services becoming more expensive over time and in Australia it is measured by the CPI, or Consumer Price Index. The RBA aims to keep the CPI between 2 to 3%, but a range of factors can increase demand on certain goods and services, pushing up prices. Inflationary pressures can be the cause of global disruption, supply chain constraints or high demand. Visit our guide on the difference between inflation and a recession.
Is inflation a good thing?
It depends on the level of inflation. In Australia, the ideal ‘goldilocks’ zone of inflation is between 2 and 3%, but in 2022, it has well and truly exceeded that mark due to a range of global and local causes, including Putin’s invasion in Ukraine disrupting supply chains and pushing up petrol prices, as well as local droughts, and the rising cost of raw materials being passed on to consumers. This has prompted the RBA to embark on a series of aggressive rate hikes to soften demand.
When will inflation peak?
The Reserve Bank of Australia, or the RBA, says inflation is forecast to peak at around 8% in 2022 before dropping in 2023. It is currently at 7.8%.
What is Australia's inflation rate?
The current headline inflation rate is 6.9%, which was announced in late November as part of the new monthly CPI update. However, the quarterly annual inflation rate—viewed as the more thorough benchmark rate—was last recorded at 7.3%. The RBA hopes to bring inflation to heel by raising rates, and to keep it within that 2-3% ‘goldilocks zone’.
What is the highest inflation has ever been?
It may feel like we are in unprecedented inflation territory, but Australia’s inflation rate has been much higher. According to Trade Economics, in 1951, it reached an all time high of 23.90%. Still our current inflation rate is the highest it has been in more than 30 years.
