Charlie Nelson
director foreseechange
May 2002
Treasury has predicted inflation of 2.5% in Australia next financial year and most market economists agree. The Reserve Bank of Australia (RBA) is expecting 3% inflation. Both may be in for a shock on the upside. If so, there is a risk that the RBA will ratchet official interest rates higher than the 5.25% to 6% expected.
Our forecast is for the headline CPI (that is, without any exclusions) to nudge 4% during the next financial year.
Consumer prices are subject to a wide range of volatile
influences. These include:
Interest rates are clearly on the way up, although we don’t know by how much. The Australian dollar has recovered a little recently and, if this persists, will put some downward pressure on prices. Against this, oil prices have risen over the last two months and show little sign of falling below $US26 a barrel. The weather is, of course, unpredictable but the National Climate Center have a put a 50% chance on another El Nino event this year.
So at least two of these factors are tending to push prices up.
In addition, there is some speculation that cost increases caused by the plunge in the Australian dollar in 2000 and 2001 have not been fully passed through to consumer prices because of post-GST price policing by the ACCC and fears of a weak economy throughout 2001. Now, with returning confidence in a strong economy and the ACCC’s eye turned elsewhere, margins may rebuild.
Our sensitivity analysis puts the range for the headline cpi in late 2002/early 2003 at between 3.2% and 4.6% higher than a year earlier. This is clearly above the RBA’s comfort zone.