RBA Governor Phillip Lowe standing at a podium under a spotlight.

Do you have the impression that inflation is out of control? Does it make you behave differently?

Inflation is rising at its fastest pace in 20 years.

The value of a typical worker’s salary has been deteriorating since mid-2021.

How worried should we be? Will things get even worse?

It’s a conundrum for the Reserve Bank, but they want you to feel like you’re in control.

Caught off guard

The recent surge in consumer inflation took the RBA by surprise.

We haven’t seen inflation like this in the modern era.

Core inflation – which removes volatile price movements from the data to see the truer rate of inflation below – rose 1.4% in the March quarter.

This is the fastest quarterly price growth since the RBA started inflation targeting in 1993.

See graph below.

The range of goods experiencing notable price increases has also widened in recent months.

During the March quarter, about 70% of the goods in the consumer price index (CPI) “basket” had an annualized inflation rate above 2.5%.

We haven’t seen widespread price increases like this since before the global financial crisis.

See below.

So not only are the prices going up, but the price increases are spreading throughout the economy.

Here is where things stand now (end of March):

  • Fuel prices jumped 35% in the past 12 months, the largest annual increase since 1990
  • Construction materials prices are 15.4% higher than a year ago
  • Durable consumer goods inflation is rising at its fastest pace in more than three decades (this category includes, among others, motor vehicles, furniture and household goods, as well as computers and televisions)
  • Grocery prices (excluding fruits and vegetables) rose 2.8% in the quarter, the largest quarterly increase since 1983
  • Fruit and vegetable prices are 6.75% higher than a year ago
  • Rents increased 0.6% in the March quarter, the largest quarterly increase since the September 2014 quarter
  • Tertiary education prices increased by more than 5% in the March quarter, due to the federal government’s decision to increase the cost of certain university courses

Has your weekly salary increased at similar rates?

I doubt.

The real value of your salary (adjusted for inflation) has probably deteriorated.

In fact, the RBA says real wages have been falling in Australia since mid-2021, and that’s hurting the poorest households the most.

“Cost of living pressures from rising food and fuel prices are likely to fall unevenly across households, as low-income households spend a greater proportion of their income in food and fuel and have relatively limited savings reserves to draw on,” the RBA said last week.

Which brings us to his decision to raise interest rates.

So where to go from here?

Last week, the RBA raised the cash rate target from 0.1% to 0.35%.

He said he did so in part because interest rates couldn’t stay at those emergency lows forever. Rates should start to return to more “normal” levels.

But he also raised the cash rate target because he’s concerned about people’s expectations.

#impression #inflation #control #behave #differently

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