The Reserve Bank wants inflation “sustainably” within its target range of between 2 and 3 per cent, and ideally at the midpoint of that range (2.5 per cent).<\/p>\n
Inflation had seemingly settled slightly above that midpoint earlier this year.<\/p>\n
But it appears to have been a mirage.<\/p>\n
It means there is now a realistic chance of a Reserve Bank interest rate hike in the next six months.<\/p>\n
Loading…<\/p>\n
It’s an extraordinary turnaround in interest rate expectations.<\/p>\n
Markets had been pricing in a small possibility of a November interest rate cut, which didn’t eventuate, after a spike in the September jobless rate to 4.5 per cent.<\/p>\n
Few, if any, economists were expecting an early 2026 interest rate cut.<\/p>\n
What’s with higher inflation?<\/p>\n
Anyone watching their budget won’t be surprised by the higher inflation result.<\/p>\n
They know. They’ve copped the energy bill shock, or the heart-sink rental price increase.<\/p>\n
Bureau of Statistics data show annual goods inflation was 3.8 per cent, up from 3.7 per cent, in the 12 months to September.<\/p>\n
The main contributor was electricity (up 37.1 per cent in the 12 months to October), influenced by the winding down of government rebates.<\/p>\n
<\/p>\n
The cost of electricity was a significant factor in rising inflation. (ABC News: Andrew O’Connor)<\/p>\n
Rents rose 4.2 per cent in the 12 months to October, following a 3.8 per cent rise in the 12 months to September.<\/p>\n
New dwelling prices rose 1.7 per cent annually, up from a 1.5 per cent rise a month earlier.<\/p>\n
But something else is going on here.<\/p>\n
An economy bursting?<\/p>\n
To get to the heart of this inflation frustration, we must get a bit abstract.<\/p>\n
The Reserve Bank says it doesn’t know for sure, but it believes aggregate demand in the economy exceeds aggregate supply.<\/p>\n
Economics textbooks tell you when demand exceeds supply, prices rise.<\/p>\n
“Inflation isn’t back because of what is or isn’t happening to taxpayer subsidies for things like electricity,” independent economist Chris Richardson says.<\/p>\n
“Inflation is back because, even though the Australian economy isn’t travelling fast, its clapped-out engine is already moving faster than we can safely travel.”<\/p>\n
He takes the engine analogy further.<\/p>\n
“With our engine clogged by poor productivity, we’re already back where we were a while ago \u2014 with inflation bouncing as too much money chases too little stuff.<\/p>\n
“There’s no easy solution to that.”<\/p>\n
<\/p>\n
Amid the drive for more housing, the cost of new dwellings is on the upswing. (ABC News: John Gunn)<\/p>\n
When demand pressure builds up in a healthy economy, smart businesses find ways to expand and produce more, taking pressure off the need to hike prices.<\/p>\n
Indeed, businesses find they make more money because the extra goods they make, at lower cost (because they’re more productive), are demanded by more customers.<\/p>\n
Australia’s not a healthy economy in relation in this respect \u2014 when the economy eats too much, it gets reflux.<\/p>\n
Interest rate antidote<\/p>\n
If the economy won’t expand to absorb the higher demand, guess what \u2026 demand needs to fall.<\/p>\n
Cue the potential need for what was unthinkable just a month ago: an RBA rate hike.<\/p>\n