Inflation is entering uncharted territory – Forbes Advisor Australia

Over the past few decades, you could always count on the fact that prices for clothing and electronics had barely increased. The price of a laptop or a pair of jeans is about the same as in the last millennium

Look at these ads from nearly 30 years ago. The price tags wouldn’t surprise you if you saw them today:

Source: Trove

In 1993, a computer cost between $1,500 and $2,000. You can find a midrange computer at a similar price today and it will do a whole lot more.

treasure

The consumer price index underlines how much we get for our money these days. It shows that in quality-adjusted terms, the price of some basic items has steadily fallen. The bars in the chart below show the change in the CPI compared to the previous year and illustrate three categories that have seen almost no price increase: women’s clothing, computers and household goods.

Household items are interesting. When these advertisements above were printed, people kept good tableware in a special walnut display case. But most households formed over the past 20 years would not have “good dishes” that they would not use.

So we had falling prices, as shown in the chart above. But wait a second. Zoom in on this last part of the graph. To improve. Wow. What this tells us is important. Prices in these categories no longer behave as they have behaved over the past two decades. The price crashes are over. Instead, they increase.

Even those categories – where Moore’s Law and the rise of Chinese industry have protected us from higher prices – have not been able to withstand a rising wave of inflation.

It sends a message. Inflation is spreading. Before, there was a mix of up and down things, but now everything just goes up. Goods and services, imported and domestic. High prices for fuel, rent, labor and shipping mean that almost no category is immune to a price hike in 2022. (Childcare is the main exception and price cuts in this space have nothing to do with the market and everything to do with subsidies).

In Comes the RBA

Official rates have increased enormously in Australia since the beginning of the year: from 0.1% to 2.85%. But official inflation-adjusted interest rates are still negative, which means you can borrow now for a year and pay off the loan with money that’s worth less.

At the next meeting in early December, a further rise above 3% is seen as a high probability, based on market prices, although the RBA pause is not out of the question.

A rise in December was seen as an even higher probability a few weeks ago, ahead of the latest US inflation data, which surprised the market by showing inflation falling 8.2% yoy to 7.7%. But beware. This figure is pulled down by the drop in used car prices. Australia’s CPI does not include second-hand goods.

Also, our economic cycle is a bit behind the Americans. Inflation rose later and the central bank reacted later. It’s kind of like how movie releases used to work – America sees the spectacle now; we get it in six months.

There is no guarantee that the CPI will fall in Australia anytime soon – indeed the Treasury and the RBA still believe that we are in the recovery and that price growth has yet to peak.

December rate hike

Stocks rose enthusiastically on lower US inflation, as rate hikes are bad for asset prices. But as the US Fed’s Chris Waller said during his speech in Sydney this week, “the market seems to be ahead of this CPI report.”

Noise plagues all economic data and a surprise result like this may be a statistical artifact, not ground truth.

With the RBA board not due to meet in January, the chance that it will pass up the opportunity for a December rate cut seems low, unless of course unemployment rises. If they rise, and if the language used to describe their inflation-fighting readiness is aggressive, expect equities and the housing market to soften in response.

Real estate prices show the opposite trend to clothing and computers. Their price has increased enormously over the last 30 years, but the price growth is suddenly very negative. You can certainly argue that households invested whatever savings they made in consumer goods to drive up the bids in housing markets. And now that process is reversed.

Comments are closed.