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Inflation: Economists urge calm on overblown fears

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The prices of consumer goods in Australia are unlikely to mimic the US experience and surge as a result of the pandemic, according to leading economists.

Inflation is expected to be higher in 2022 than it has been in previous years as businesses continue to face disruptions to their supply chains.

But economists say fears of crippling price rises are overblown, with the Reserve Bank of Australia ready to hike rates to stop the economy from overheating.

It comes as an international study by Ipsos finds 75 per cent of Australians expect prices to rise faster than incomes in 2022.

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Price rises to be expected

University of New South Wales professor of economics Richard Holden said although inflation is likely to be higher in 2022 than it has been in recent years, Australians shouldn’t worry.

He said some inflation is to be expected after prices were temporarily depressed during the pandemic – as previous inflation data has shown.

Ongoing supply chain issues will put some upward pressure on prices in the short term, he said, particularly on products such as used cars, which hit record-high prices in September.

But these issues are expected to be temporary, and the RBA can intervene if they aren’t.

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Dr Holden said the RBA has been “very clear” that it will use interest rates and other forms of monetary policy to slow down economic activity before inflation rises above 3 per cent.

But beyond consumer goods, Dr Holden said surging house prices and rents pose major concerns for people’s cost of living.

Data published in November shows property prices rose four times faster than wages over the past 40 years, pushing younger people out of the suburbs in which they grew up.

“Whether that will continue to happen, or whether it’ll just tend to level off a bit more, we’ll have to wait and see,” Dr Holden said.

Meanwhile, independent economist Saul Eslake said Australia is unlikely to replicate the record levels of inflation seen internationally.

In the US, annual inflation rose to 6.8 per cent in November, the highest level since 1990, while inflation across the 19 countries in the Eurozone reached 4.9 per cent in the same month.

Mr Eslake said the high inflation experienced internationally was largely the result of higher natural gas prices, on which Australia relies very little for its energy needs.

He said Australia experienced higher electricity prices a decade ago, but nothing suggested it would do so again soon.

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Inflation to boost wages: RBA

Mr Eslake said the RBA wants higher inflation to encourage stronger wages growth.

In a speech to the Australian Business Economists in November, RBA governor Philip Lowe said higher inflation could possibly lead to workers seeking larger wage increases.

The government’s Mid-Year Economic and Fiscal Outlook released in December shows real wages (inflation-adjusted) are expected to fall by 0.5 per cent over the next 18 months.

And that’s before taking into account taxation.

But Mr Eslake said he expects the country’s unemployment rate to fall faster than the government’s forecast of 4.25 per cent by June 2023.

And if that happens, employees will have more bargaining power, which could see wages rise faster than the government has predicted.

“I think it’s quite possible that the unemployment rate could be down to 4 per cent by this time next year, or sooner,” Mr Eslake said.

“It’s certainly possible that by late 2022, or early 2023, wages growth could be running faster than inflation.

“But that’s not what the government or the Reserve Bank is forecasting at the moment.”

Dr Holden agreed that if unemployment continues to fall and the economy is doing well by this time next year, stronger wages growth is “definitely on the cards”.

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