When will the CPI start to rise again?
I'm going to make a forecast which is contrary to the opinion of nearly every economist in Australia. That's not always a bad thing - most economists are wrong anyway. I'm suggesting that the inflation genie is just resting, and will be back out of the bottle and sunning itself on a beach in 2010.
While the latest figures released by the ABS suggest that inflation is under control, there are some worrying trends, and some medium to long term factors not taken into account by economists.
Yes, inflation has dropped, coming in at an annual figure of 2.5%. Even so, the last quarter saw a modest rise in inflation, of .1%. That's still a rise. The previous quarter saw a fall of .3%.
The biggest contributors to the low CPI were falling loan and deposit costs and petrol, both of which have dropped significantly. There are also lower prices in clothing and footwear as well as cheaper domestic and overseas travel.
However, some of the rises in the last quarter are significant and have offset the falls. Prescription drugs are up more than 13%, secondary education up 7.6%, fresh food up 6% and electricity up 3.6%. And in a worrying sign, rents were also up by 1.7%
So why could we see a breakout of inflation again? Too much money in the hands of too many consumers willing to spend. The stimulus packages from the Rudd Government have been moderately effective. At least some of the money handed out has been spent on the domestic economy, helping to maintain growth.
But a significant portion of the money has been saved. In bad economic times, people take a much more cautious approach. But this is money that comes on top of regular salary - ie, its not money which is generally available to the consumer. It will be spent at some point.
Disturbingly, these handouts are to people who are also saving many hundreds of dollars every month on lower interest rates. The average saving per mortgage every month is around $800, after the RBA cut rates by 425 basis points.
That's a whole lot of cash just waiting to be spent. Australians have shown no reluctance in good times to spend spend spend on various consumables and things like travel. All it will take is a moderate but sustained feeling of an improving economy. If Australians feel confident, they will spend. And they will likely move as a pack, doing it all at once.
Even before the impact of renewed spending, there are already worrying signs. Petrol has already come off its lows of just over $1 a litre and is slowing creeping upwards, rents are on the up and the housing market for buyers is showing no sign of cooling. It was record territory for the banks dishing out new loans over the last few months.
While inflation is within the RBA's target zone of between 2 and 3%, it wont take long when the spending starts for a sharp increase in this figure. Once the genie emerges from his hibernation, wait for the RBA to act. That means higher interest rates and the cycle starts again. And it may be sooner than you think.
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