The light at the end of the tunnel…..

Well, here we are again. Despite the hot summer, Marketwatch is feeling refreshed after a bit of a break and has decided to look at where we left off last year.

So let’s have a quick recap. Inflation had reared its head in the United States but the Federal Reserve tended to regard this as a “transitory” situation because the world’s supply chains were dysfunctional. The argument was that there was the capacity to meet demand, but the supply was in the wrong place. Once the logistics were unscrambled, life would go back to normal, tra la. Provided, that is, you ignore the several trillion dollars pumped into the economy by both Trump and Biden. The risk of overheating demand would have been obvious. And join with me in singing the chorus, “when demand outstrips supply, prices go sky high”. Wisely, the Federal Reserve stopped using the transitory line.

Because it did not apply the same level of stimulus to its economy, Australia, in the meantime, patted itself on the back that it would be different here. But although there a few different factors influencing us, the only real difference is that our inflation isn’t at the same level as others in the US and Europe. As economic justifications go, that’s not the way to win gold medals. Just because others are worse off gives provides no cause for celebration for our inflation number.

Australia’s inflation for the year to December 2021 was 3.5%. For Perth it was actually 5.7%. Now as we have noted before, the Reserve Bank (RBA) and economists like to get an idea of the underlying trend by stripping out what are regarded as volatile items so they can see what regularly occurring items are doing. Once that is done, the number drops to 2.6% for the country. Unfortunately there isn’t a similar number for Perth.

So, if we haven’t flooded our economy with cash, as the US did, what is causing our inflation? Not the easiest question but here goes anyway.

One easy answer is the worldwide disruption to the supply chain. As this gradually gets fixed and there is a smoother flow of shipping and goods, supplies should increase and slow down the rate of price increases. But note that I didn’t say that prices would come down. Yes, there may be some downward adjustment in things like used cars as the availability of new cars improves. But for the large part, pricing will be what it is. We just may not see such rapid increases.

A key factor in our inflation is associated with transport costs. We all know that petrol and diesel prices have increased significantly. Because inflation is an average of increases across a wide range of goods and services. The Australian Bureau of Statistics has noted that “Automotive fuel prices rose for the sixth consecutive quarter, resulting in the strongest annual rise since 1990. The Automotive fuel series reached a record level in the December quarter due to higher global oil prices amid economic recovery and lower global supply.” Lower supply may well persist for quite some time as oil companies are not investing in new exploration and climate change pressures make them wary.

Fuel prices don’t just directly affect us as we fill up our vehicles. They also are a component in manufacturing, transportation, travel and a whole range of other activities. This is putting businesses under twin pressures. Firstly, they have to manage the cost increase. In many cases we are seeing these costs being passed on to their customers where contracts permit. And secondly, they have to manage the pay of their employees who are finding now that, in real terms, they are worse off than before. Again, this will ultimately be passed on to the customer.

For a while, customers may push back. They may, for example, change brands in the hope of containing costs. Going down market by chasing price is, more often than not, a futile exercise that frequently ends in tears. But in the end you cannot escape from reality. Higher prices affect us all. Many customers are employees who will put pressure on their employers for pay increases. You get the drift, don’t you?

Enter then, the Reserve Bank. Previously, they had said that they did not expect interest rate rises to be applied until 2024. Then that came down to 2023. Now the RBA Governor has described an increase in 2022 as a “plausible scenario”. Central banks in the US, the UK and New Zealand have already done this. Interest rates everywhere are incredibly low, but for us, household debt in incredibly high as ultra-cheap money fuelled an increase in debt. Even modest interest rate increases have an amplified effect on the large debt pile. And many households are, yes you guessed it, employees.

The pressures are now more evident than we were seeing before Christmas. They probably won’t kill us, and we probably won’t see a recession. But that lazy, hazy era of cheap money is probably over and we are moving to a time when prices do go up and we have to be more choosy about what we buy.

In a previous incarnation, Marketwatch worked for US companies in Europe and travelled extensively through both continents. A much respected American colleague of his often would say, “if you can see light at the end of the tunnel, chances are it’s a gorilla holding a torch”. Let us hope that, for this, he was wrong.

Gosh, its been hot. These are testing times for wine drinkers who may be eying up a cold beer, or a cider on ice. Somehow, even a good white does not have the same appeal in 42֯C. But, for those who have not tried it, chill a bottle of Pinot Noir in the fridge and enjoy that instead. Don’t nearly freeze it as many beers are. A gentle 12֯C will do the trick, pretty much the temperature at which you should keep white wine. Marketwatch enjoyed a wonderful bottle of Stoneleigh Pinot Noir from New Zealand. But there are plenty of good ones both from NZ and colder areas such as Tasmania. WA makes a few, most notably to my mind, the Pierro Pinot Noir, a fantastic drop. Go on, try something different.

 

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