The inflation data is hot, but I don’t think its getting hotter.
So there’s an awful lot swinging on what inflation does right now.
Not only is inflation eating into household budgets, it’s what’s prompted the RBA to go on the most aggressive rate hiking campaign in history.
(Though to be strictly accurate, it’s the fear of inflation rather than the inflation itself.)
True enough that we’re now looking at the highest inflation in 30 years. Putting aside a brief spell when the GST came in in 2000, you’ve got to go back to the early 90s to see inflation at levels like this.
And it’s actually worse than it looks in terms of household budgets. That’s because the price of non-discretionary items (things you don’t have any choice about spending on or not) is rising much faster than non-discretionary.
That means there’s no way for households to dodge the inflation bullet.
That said, it’s not all bad. Women’s clothing is still cheaper than it was back in 2012, so I guess we’ll take our comforts where we find them hey ladies?
But the thing that really jumped out at me in the latest inflation data is just how much of this is related to “goods” as opposed to “services”.
Goods prices are lifting quickly, and accounted for 79% of the most recent inflation number.
And what does that mean?
Well it means that inflation isn’t spreading to the service sector yet.
And it’s in the goods sector because goods got a double whammy. Goods demand lifted during Covid because you just simply couldn’t go out and buy services like haircuts and what have you.
And so goods consumption boomed during Covid.
At the same time though, global supply chains became completely constipated, and prices surge on the back of shortages everywhere you looked.
But the economy is opening up again – you can go out and get a hair cut – and supply bottlenecks are easing.
To wit, the price of oil has already rolled over and has started falling:
And so has the price of wheat:
And what all that means is that demand for goods should normalise, just as the supply of goods normalises too.
And that reset in supply and demand should settle prices.
Which makes me think that inflation may have already peaked. Maybe not in an annual sense, but potentially in a quarterly sense.
(Inflation was 2.1% in the March quarter, and down to 1.8% in the June quarter.)
And that potentially means that the RBA should probably hold fire for a little bit, just to make sure it’s not jumping at shadows.
The inflation problem may already be sorting itself out.
DB.