Australia’s inflation demise. Let’s break it down

Australia’s inflation demise. Let’s break it down

Australia’s inflation rate currently stands at 7.0% – so the overall cost of living has risen by this much over the past year. 

The inflation rate for March 2023 was 6.3%. The RBA's ideal inflation rate is around 2-3%.

The most significant price rises in March 2023 were Medical and hospital services (+4.2%), Tertiary education (+9.7%), Gas and other household fuels (+14.3%), and Domestic holiday travel and accommodation (+4.7%).

Inflation Explained

Inflation refers to the sustained increase in the general price level of goods and services in an economy over time. Several factors can contribute to inflation, and they can vary from country to country. Here are some common factors that can lead to inflation:

1. Increase in demand: If there is a surge in consumer spending or investment, it can drive up the demand for goods and services. When demand outpaces supply, prices tend to rise.

2. Cost-push inflation: This occurs when the production costs for businesses increase. Factors such as rising wages, higher raw material prices, or increased energy costs can lead to businesses passing these costs onto consumers in the form of higher prices.

 A “wage-price spiral”, is when price rises cause wages to increase which in turn causes further price rises, which was an issue of the 1970s inflation period.

3. Monetary factors: Changes in the money supply, interest rates, or exchange rates can impact inflation. For example, if the central bank increases the money supply excessively or lowers interest rates significantly, it can lead to higher inflation.

4. International factors: Changes in global commodity prices, such as oil, can affect inflation in countries that are net importers of those commodities. Fluctuations in exchange rates can also influence the prices of imported goods.

5. Government policies: Government actions, such as changes in taxation, subsidies, or regulations, can have an impact on inflation. For instance, if the government increases taxes or imposes tariffs, it can lead to higher prices for consumers.

How did the inflation rate in Australia start spiralling? Let’s break it down

Australia is experiencing record levels of inflation as a result of knock-on effects from the COVID-19 pandemic, Russia’s invasion of Ukraine and strong consumer demand.

1. Australia is in the midst of a supply-side inflation shock, with price increases being driven by breaks in supply chains because of the pandemic and natural disasters, as well as energy supply disruption due to Russia’s invasion of Ukraine

2. Company profits, not wages, have driven the soaring inflation in Australia, an analysis from the Australia Institute has found. The thinktank has released evidence of what it calls a “profit price spiral”, arguing big business earnings account for 69% of the inflation that is above the reserve bank’s target range of 2-3%. Evidence shows the additional billions of dollars in company profits have led the soaring inflation Australia is experiencing. And that without those profit gains, inflation since the pandemic would have risen much more slowly, at just 2.7%. Company profits, not workers’ wages, are the culprit for Australia’s inflation issues and that the RBA and government should be focusing on those rather than targeting workers through rising interest rates and low wage growth.

The companies in Australia posting the highest profits include 

                •             Origin Energy. Revenue: $9.89 billion. 

                •             CSL. Revenue: $10.49 billion. 

                •             Metcash. Revenue: $10.71 billion. 

                •             Viva Energy. Revenue: $11.52 billion

                •             National Australia Bank. Revenue: $11.93 billion.

                •             ANZ. Revenue: $12.33 billion. 

                •             BlueScope Steel. Revenue: $13.06 billion. 

                •             Telstra. Revenue: $14.39 billion

                •             Ampol. Revenue: $15.52 billion

                •             Commonwealth Bank. Revenue: $16.46 billion

                •             Fortescue Metals Group Ltd. Revenue: $17.3 billion 

                •             Westfarmers (home improvements and office supplies). Revenue: $25.23 billion

                •             Coles Group. Revenue: $27.08 billion

                •             Woolworths Group. Revenue: $41.86 billion

                •             BHP Group. Revenue: $65.09 billion

A “rich get richer" phenomenon is evidently prevalent in Australia. 

And the low-middle classes need to find resilience and perseverance in the face of financial adversity.