Australia’s inflation problem is ‘homegrown’.

Australia is grappling with a domestically originated inflation challenge, countering assertions that escalating prices are primarily influenced by global factors beyond the central bank’s sphere of influence. The inflationary issue is predominantly rooted in internal dynamics and demand, necessitating a considerable timeframe to realign inflation with the target.

Various services such as supermarkets, butchers, hairdressers, dentists, dining out, and recreational activities are witnessing substantial price hikes. The remarks made by Ms. Bullock aimed to refute the notion that interest rate increases were merely causing distress to borrowers, challenging the prevailing belief that inflation was predominantly steered by global factors.

The Albanese government has largely endorsed this perspective, with Assistant Treasurer Stephen Jones emphasizing the universality of the situation across countries. While acknowledging global uncertainties, supply chain constraints, and decisions by oil-producing nations, Ms. Bullock asserted that supply-side factors no longer predominantly steer inflation, contrary to the previous year. Homegrown inflation, according to her, is more persistent than disruptions caused by supply-side issues, such as fluctuations in oil prices.

Ms. Bullock projected that the process of bringing inflation back to the target would extend over two years, necessitating a closer alignment of aggregate demand and supply. Despite her concerns about the potential durability of high inflation, market confidence in her raising the cash rate beyond 4.35 percent remains low. Market predictions indicate a mere 5 percent probability of a rate hike at the RBA’s final board meeting on December 5, with the likelihood peaking at approximately 40 percent in March 2024.

Ms. Bullock outlined three indicators suggesting that inflation is demand-driven. Firstly, it is widespread, with about two-thirds of items in the consumer price index basket experiencing inflation rates above 3 percent. Secondly, the labour-intensive services sector increasingly underpins inflation, driven by rising costs in wages, business rents, and insurance. Finally, the labor market remains exceptionally robust, with the jobless rate hovering around a five-decade low of 3.7 percent.

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One comment

  • Robin November 26, 2023   Reply →

    The first response of political parties when something goes wrong or doesn’t work is it’s caused by someone else or global influences. There’s much we could be doing domestically to fix things up.

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