Inflation may be coming back, and with it more interest rate hikes
After more than a year of spiralling prices and interest rate hikes, the worst seemed over, but the threat of inflation has returned.
AMP economist Diana Mousina (photo supplied)
AMP deputy chief economist Diana Mousina said some leading indicators were showing a return of inflation while agricultural commodity prices were rising as were commodity prices.
Inflation as measured by the consumer price index is currently at 6 per cent and 4.9 per cent for the month of July. It reached 7.8 per cent in December 2022.
While it has trended down there has recently been a spike in petrol prices which have again soared well above $2 a litre. Wages had also increased and there was a growing confidence that consumers would start spending again after cutting back as rates climbed.
“Upside inflation shocks could lead to renewed concern about further rate hikes, higher bond yields and the risk of a recession which would be a negative for sharemarkets,” Mousina said.
She said AMP still forecast lower inflation this year as the impact of interest rate hikes flowed through the economy.
“But it is worth watching the leading inflation indicators for signs of persistent upside inflation risks,” she said.
Among her concerns was the NAB business survey which showed prices were trending up in July, which may have been a one-off spike from wage increases, but it was an indicator that needed to be watched.
“Extreme weather events can cause disruptions to food production and supply leading to volatility in food prices. While central banks usually look through spikes in prices, the events of the past few years have shown that temporary price changes can seep into numerous components of the supply chain. After large increases in food prices throughout 2021-22, food inflation is expected to slow further.”
However, the emerging El Nino weather pattern could cause higher agricultural prices because of lower production stemming from lower rainfall and more heat. However, the impacts were not clear-cut and the La Nina weather pattern also caused supply disruptions from heavy rain and flooding.
“However, there is a risk that El Niño leads to higher Australian agricultural prices over the next three to six months,” Mousina said.
