Guessing when inflation will reach its peak in Australia is as hard as picking the winner of the Melbourne Cup.
The Treasurer, Jim Chalmers in July delivered the sobering forecast that inflation would likely peak in Australia in December at 7.75 per cent. In comparison to the rest of the world, that would be a good result. The US was already at 9.1 per cent at the time of publication, and the UK was reaching 9.5 per cent.
Mr Chalmers said: “We haven’t reached peak inflation yet – but we can see it from here.”
By contrast, the IMF predicts global inflation to reach 8.3 per cent by the end of the year or go back only as far as May, during the election campaign, and inflation was tipped to be just 4.5 per cent.
Economists cannot agree on when or how high inflation will go, but one thing they do all agree on: it won’t be easy to rein in.
In July, the RBA admitted it had got it wrong and like central banks around the world was trying to recalculate its forecasts using modelling that seems as solid as a house of cards. It indicated it would continue to hike the official interest rate in a bid to curb soaring inflation, fuelling higher mortgage rates, while everyday essentials remain expensive.
In an article in The Conversation in June independent economist Saul Eslake said it was hard to be confident about when inflation will peak, saying a lot depends on the outcome of the Ukrainian conflict and when supply chain issues ease.
“It’s not impossible that things could turn out ‘better’ than these forecasts [Treasury] – in which case, no doubt Treasurer Chalmers will want to claim some credit,” he wrote just after the Treasurer’s July announcement.
“They could, of course, also turn out worse.”
However, the big four banks and even the RBA agree that around seven is the lucky – or unlucky – number in regard to how high inflation will rise before – hopefully – slowly decreasing.
It all depends, however, on how high the RBA raises the cash rate over the next few months, and whether that will have the desired effect in curbing spending and preventing a wage spiral.
RBA governor Phillip Lowe said in a speech to the American Chamber of Commerce in Australia in July that inflation is likely to peak at 7 per cent in December 2022 and the bank’s board is committed to “doing what is necessary to ensure that inflation in Australia returns to target over time”.
Mr Lowe’s fear is higher inflation will become embedded in expectations and an “inflation psychology” could lead to wage-price and “price-price” spirals as suppliers of goods increase the price of the inputs used to make other goods. In the worst case, it would take a recession to get inflation back under control.
In June, federal government Treasury secretary Steven Kennedy said in a speech to the Australian Business Economists that inflation is likely to rise “potentially well above 6 per cent and remain there for the rest of this year” and will only start to recede when global consumption patterns normalise and migration patterns pick up.
At the time of going to print, the big four banks had not yet released their updated forecasts but back in their June quarterly reports, most were expecting inflation to top out around 7 per cent.
The ANZ Bank is the most pessimistic of the big four in predicting that inflation will peak at 7.1 per cent in the final quarter and adding that it does not expect trimmed mean inflation to reach the RBA’s preferred target band of 2-3 per cent before 2025.
The Commonwealth Bank is the most optimistic saying in its June 2022 Economic Insights: Global Economics & Markets Research report, that inflation should peak at around 6.25 per cent and forecasting that it should return to the RBA target of 2-3 per cent by 2023.
Meanwhile, the NAB, in its June Business Research and Insights report put the inflation figure a little higher at around 6.3 per cent in the third quarter of this year and said with cash rate rises of 50 basis points in July and August, and then a drop to 25bp by November the RBA should hit is 2.6 per cent target by the end of next year.
Finally, Westpac forecast in its June 2022 Bulletin that inflation will peak in December at 6.6 per cent and will ease to three per cent in 2023 when petrol prices start to come down and with a predicted weaker growth in the price of electricity, construction materials and food.
But it really doesn’t matter who picks the winning combination of date and figure because in the end there are no prizes, just a lot more financial pain for businesses and consumers.
