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Global patterns signal potential decline in Australian inflation

By Maja Garaca Djurdjevic
3 minute read

Australian inflation, which lagged on the way up, is now following the global trend, according to a top economist.

Data is indicating a potential decline in Australian inflation in the coming months, reflecting the broader international pattern.

In his latest market update, AMP chief economist, Shane Oliver, said that having lagged on the way up, Australian inflation is now aligning with the broader global pattern, indicating a potential decline in the coming months.

“While there is high anxiety about sticky services inflation, inflation is continuing to fall about as quickly as it went up,” Dr Oliver said.

“Relative to the US, Canada, Europe and the UK, Australian inflation lagged on the way up and peaked a little later (partly reflecting the slower reopening from covid) and it’s doing the same on the way down so there is no reason to be alarmed that it’s higher than in North America and Europe,” he explained.

“More broadly because the surge in global inflation led that in Australia, the decline in global inflation points to a further decline in Australian inflation ahead”.

However, amid his optimism, Dr Oliver said that notable risks persist, including the potential escalation of the Israel–Iran conflict, a looming risk of recession, and uncertainties surrounding China’s property sector. Additionally, high bond yields, persistent services inflation, and lingering concerns over US–China relations contribute to the likelihood of continued volatility in financial markets.

Looking towards the Reserve Bank’s last decision of the year in two weeks, Dr Oliver noted while the wages and jobs data showed marginal strength beyond the central bank’s forecast, he deems this insufficient to trigger another rate hike.

“The 3.7 per cent unemployment rate for October is roughly consistent with the RBA’s forecast for 3.8 per cent this quarter and the RBA forecast a rise in wages growth to 4 per cent and with its business liaison program pointing to a slowing in wages growth next year it’s not likely to be too concerned,” Dr Oliver said.

“So, on their own they are unlikely to trigger a rate hike next month. Our base case remains that rates have peaked, but the risk of another hike remains high, at around 40 per cent, particularly if upcoming retail sales and inflation data are stronger than expected and if productivity growth remains weak”.

Dr Oliver also addressed the recent disruptions at DP World ports and Optus in the past two weeks, underscoring the economy’s susceptibility to supply-side shocks. Fortunately, he noted that both incidents appear to have been relatively brief, though cautioned that DP World could still pose more risk due to potential strike action.

“Extended supply shocks would risk adding to inflation pressures,” Dr Oliver said.

Ultimately, he anticipates that the next 12 months will likely see a continued alleviation of inflationary pressures, with central banks beginning to ease their tight monetary policies.

“This should make for reasonable share market returns, provided any recession is mild,” the economist said.

But for the near-term, Dr Oliver warned, “shares are at high risk of a further correction given high recession and earnings risks, the risk of high for longer rates from central banks, high bond yields which threaten share market valuations and the risk that the war in Israel escalates to include significant oil producing countries like Iran”.