Australia’s economy appears to have passed a milestone that will have major implications for businesses, mortgage payers and political debate.
The news is that inflation, which has been dormant for nearly a decade, is on the rise. The consumer price index, which measures a “basket” of goods and services for an average household, rose 3.5% in 2021.
If inflation continues to rise, pressure will mount on the Reserve Bank of Australia to raise interest rates which are stuck at an all-time low of 0.1% since November 2020. The RBA aims to keep inflation within a range of between 2% and 3%.
Rising inflation has been driven by short-term or one-time factors, such as rising gasoline prices and the end of government subsidies for homebuyers, but many economists believe inflation is likely to last.
The underlying inflation rate that takes into account these one-off impacts has risen to 2.6 in 2021, its highest level in eight years.
The RBA has previously said it won’t raise rates until 2023 or 2024 to give the economy time to recover from the pandemic, but many banking economists say the unexpectedly rapid rise in inflation l will force us to act sooner.
Hardly anyone expects the RBA to raise rates at its first meeting of the year next Tuesday, but RBA Governor Philip Lowe will likely provide signals on how quickly he expects to. rates return to a more normal level.
The RBA will likely wait for the next official inflation data in April before raising rates.
The RBA has good reason to be cautious. Some economists say the rise in inflation has been exaggerated by the shortages and bottlenecks caused by the pandemic; once things get back to normal, prices will stop rising so fast.
Some argue that the RBA should wait for signs that wages are rising sharply before worrying about inflation. The pandemic, of course, remains a huge unknown.