Inflation Slows to 6.8% signaling a Pause in Interest Rates
Markets Bet on Rate Pause After Inflation Slows to 6.8%
The latest data from the Australian Bureau of Statistics (ABS) shows that inflation has eased for the second consecutive month, falling from 7.4% to 6.8% – softer than anticipated. Though the government claims that inflation is heading in the right direction, the reality is that inflation remains high relative to historical data.
The recession and the COVID-19 pandemic have put immense pressure on supply chains worldwide. In Australia, this has resulted in skyrocketing material costs and labor shortages, translating into a 13% year-on-year rise in the cost of building a new home and a 4.8% increase in rental prices.
Electricity prices have seen a staggering 17.2% hike since last February. Meanwhile, holiday travel and accommodation have surged by 14.9% annually. The impact of electricity price hikes may take a while to filter through various industries, but one sector that will undoubtedly feel the brunt of it is manufacturing, with many factories embracing renewable energy to keep production costs low.
While there is an ongoing debate about the need for further rate increases, the RBA is expected to hold the cash rate at its current level of 0.1%. This aligns with forecasts from economists, who believe that a rate increase, even a small one, would be risky at this stage, given the economy’s weak growth.
Related Facts:
• The January and February monthly inflation figures recorded the two lowest within-month inflation figures since mid-2021.
• The acute shortage of properties has pushed rents 4.8% higher over the year.
• The cost of building a new home is 13% higher than a year ago.
• Electricity prices are currently 17.2% higher than last February.
Key Takeaway:
Though inflation is easing, it remains high historically, with various factors like material costs, labor shortages, and supply chain issues putting pressure on the economy. Given the current economic climate, tAs a result, the RBA is expected to hold the cash rate at its current level of 0.1%. While businesses and individuals can breathe a sigh of relief with this pause, it may be a reprieve before rates start to rise again.
Conclusion:
The month-on-month volatility in inflation indicators suggests that the economy is still adjusting to the post-COVID-19 world, and further data is needed to understand the trend correctly. In this climate of uncertainty, the RBA will proceed cautiously and keep interest rates low to support economic growth. However, given the persistently high inflation rate, the situation remains under review, and rate adjustments may still be on the cards.
