A string of high inflation readings were recorded in New Zealand, the United Kingdom and Canada last week, lifting expectations for a tightening of monetary policy by central banks.
Inflation expectations have also grown in the US as the five-year break-even inflation rate for Treasury inflation-protected securities reached its highest level in over 15 years.
Commenting on these events, AMP Capital chief economist Shane Oliver said that much of the pickup in inflation was related to pandemic-driven distortions in spending patterns.
As the pandemic continues to be brought under control, Dr Oliver is confident that the situation should theoretically return to normal.
“The concern is the longer it takes, the greater the risk that it becomes a permanent rise in inflation, so that’s why markets are getting worried about it,” Dr Oliver said.
“There’s fear that the more inflation shocks we have, the more likely it will become entrenched and will be harder for central banks to get it under control.”
Dr Oliver said that some central banks, including New Zealand, Canada and the UK, were right to be concerned about inflation, while others, such as Australia, US and Europe, have seen long periods of undershooting on inflation even in the pre-pandemic years.
In comparison with New Zealand, where the underlying inflation rate has already reached 3 per cent, it remains under 2 per cent in Australia, therefore Dr Oliver understands why the RBA is being “a bit more cautious”.
“It’s the biggest uncertainty affecting investment markets at present and it’s likely these concerns will linger for a little while yet,” he said.
Ahead of this week’s inflation data, AMP Capital has forecast a rise of 0.8 per cent for the September quarter and annual inflation of 3.1 per cent. Commonwealth Bank economists are also predicting a quarterly rise of 0.8 per cent.
An underlying inflation figure of 0.5 per cent for the quarter and 1.9 per cent for the year is expected by AMP Capital, while CBA’s predictions are a little more modest at 0.8 per cent and 1.8 per cent, respectively.
Dr Oliver noted that AMP Capital’s forecasts were “fractionally above” what the RBA forecasts imply, but not enough for an interest rate movement to be brought forward.
“That said, if there is an inflation problem that is sustained globally, that will ultimately have an impact on Australia as global costs go up and that impacts imported inflation,” he said.
A recent report from Oxford Economics found that the United States, United Kingdom and Germany recorded an “unusually high” number of sectors with extreme rates of inflation.
Breaking down the US CPI into 72 sectors (excluding food, energy and shelter) revealed that 28 per cent recorded “extreme inflation rates” at the peak in June.
Oxford Economics said that the number of extreme inflation rates in the UK and Germany were also historically high, with sharp rises in all three economies for certain household goods, electrical products, vehicles and meals out.
While noting that the inflation data did not suggest “we are on the cusp of a new inflation regime for advanced economies”, Ben May, director of global macro research at Oxford Economics, said it was still worth monitoring.
“We still think that the most likely scenario is that the inflation distributions gradually move back towards their pre-pandemic norms via a combination of base effects easing supply-chain disruptions and relatively contained second-round effects due to longstanding disinflationary forces,” Mr May said.
“But the sectoral distributions warrant close watching as an early warning sign that more deep-seated shifts in the inflation generation process may be taking place.”
