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The Inflation Situation: Australia

The inflation rate in Australia is the highest it has been in over twenty years. This sustained high inflation has forced the Australian government to raise interest rates five separate times between May and September 2022. The Reserve Bank of Australia (RBA), Australia’s central bank, is trying to walk a thin tightrope that is proving difficult for central banks throughout the world: sustaining economic growth while putting an end to inflation. Interestingly, the Australian government is being very candid about this entire process. The country’s Australian Bureau of Statistics (ABS), previously calculated the Consumer Price Index (CPI) on a quarterly basis, but it has recently promised to release monthly reporting from October.

Looking Back

Before the pandemic, inflation in Australia was at a healthy level, between 2 and 3 per cent. During the early days of the pandemic, there was actually slight deflation, and the island nation finished 2020 with overall inflation of around 1%. Inflation returned to normal levels of 3% by the end of 2021, although much of the annual increase was based on the low inflation of the previous year. By Q1 2022, inflation rocketed up to 5.1%. Much of this increase was due to increased construction and fuel costs. Housing was also in extremely high demand due to extremely low interest rates. With high demand and a short supply, housing costs also skyrocketed, further fuelling inflation. Fuel costs were the highest they had been in Australia since Iraq invaded Kuwait in 1990 and caused global concerns over energy security. Although Australian inflation is behind that of both the UK and the US, the country is still experiencing its highest inflation since the dot-com bubble burst. Back in February, the RBA predicted inflation of 3.25%; it has since revised its expectations to 6%, with 3% inflation returning only in 2024.

Who hurts?

Workers. Some have pointed to wage growth as the cause of inflation, but the data do not support that opinion. The average Australian has lost 3.9% of their purchasing power in the last two years. In fact, the last two years have wiped out over eight years of wage gains. It should be noted that these gains over the last decade came only after the Great Recession, which means those gains were coming from a suppressed baseline. Real wages are not expected to recover until 2024, meaning that real wages will have fallen for three consecutive years. Simply put: Australians will be poorer in 2023 than they were in 2019. In fact, even if wage growth recovers at a rapid clip, Australians will still be worse off. We knew there would be long-term side effects of the pandemic; economically speaking, everything just seems to have gotten worse.