Inflation in Australia may well have passed its low point and the big question now is how far will it rise and how fast? We wouldn’t read too much into the rise in headline inflation in the third quarter, to 1.3% from the 16-year low of 1.0% recorded in the second quarter. Headline inflation was always going to rise at some point as the drag from the previous large falls in petrol prices fades. Indeed, it’s on track to climb to around 1.7% by the second quarter of next year. Since it strips out the temporary influences, underlying inflation is much more important as it provides a guide to where headline inflation will settle in a couple of years. In the third quarter, an average of the two main measures of underlying inflation fell from 1.6% to 1.5%.
For some time we have been forecasting that underlying inflation will drift higher next year, but that cyclical and structural forces will prevent it from rising as fast as the RBA expects. The most recent development is that the rise in commodity prices could mean the downward pressure on underlying inflation from cyclical factors fades a bit quicker.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
