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Highlights
- The fiscal and monetary stimulus provided during the pandemic has created an environment shaped by rising prices.
- Rising employment in Australia is somehow fuelling inflationary concerns.
- In case inflation continues to rise, the RBA might be caught in a tight spot to increase interest rates.
Inflation seems to have become a pressing issue plaguing the economy, especially after pandemic-relief policies came into operation. Most countries are now in the post-relief period where fiscal and monetary stimulus has created an environment shaped by rising prices.
Property markets seem to be intensifying inflationary concerns, with housing prices skyrocketing to unprecedented highs. In the given scenario, all eyes are now glued on the upcoming inflation data, set to release this week on 25 January.
Experts at the Commonwealth Bank of Australia (ASX:CBA) are predicting the headline inflation to stand at 3.2% in the results due Tuesday. Meanwhile, the bank expects the trimmed mean inflation to hit 2.5% in the December quarter.
The Reserve Bank of Australia’s (RBA) stance on the latest inflation data would reveal how close the economy is towards an interest rate hike. Currently, the central bank’s inflation target is 2-3% for the underlying measure.
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Rising employment needs attention
Australia has seen a considerable increase in employment in November and December 2021, with the jobless rate plunging to its lowest in 13 years in December 2021. The latest data from the Australian Bureau of Statistics reveals that the country’s unemployment rate dropped to 4.2% last month, only slightly higher than the jobless rates seen in the 1970s of below 4%.
The country observed an increase of 65,000 people in the workforce last month, which is starting to worry some experts as rising employment is often a precursor to rising inflation. The better-than-expected labour market result for December has built up sharp expectations of an inflation hike in the upcoming CPI data.
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Interest rates hikes soon?
A crucial decision is awaiting experts on the RBA’s quantitative easing measures, which could be shaped by the forthcoming inflation results. With the US central bank poised to increase interest rates this year, investors in Australia’s bond market are trying to evaluate if the RBA’s bond-buying program would end in the February meeting. In case it happens, there is a high likelihood of an interest rate hike in Australia this year, which the RBA said will not happen before 2023.
While economic pundits have long anticipated a rate hike, the RBA has time and again maintained ambiguity on the topic. However, given the swift rise in inflationary expectations, the RBA might be caught in a tight spot where there could be no other option than to increase interest rates.
The RBA has also insisted on acting on the actual data rather than the headline inflation figures. This has led to an unavoidable delay in policy action. The delay is even more pronounced when Australia is put on the global map where major economies worldwide are witnessing rate hikes, with rates rising more than once per year in certain nations.
The pressure is now on the Reserve Bank to devise a perfect strategy to prevent a sharp increase in prices while maintaining stability in households and businesses. The upcoming inflation data, alongside the first RBA monetary policy meet of 2022, would make for the perfect mix of information to gauge the central bank’s next course of action.
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