Price pressures: where global is becoming local

COVID-19 has thrown a lot at Australia – and the world – and inflation is emerging as the latest symptom of the pandemic. Global prices collapsed in early 2020, but a combination of supply chain pressures, a global energy crunch and tight labour markets have all pushed up prices in recent months. In the US, inflation is at its highest rate in 40 years at 7.0%. And it’s at a 30-year high in the EU at 5%.

Driving much of the global price pressures are supply constraints. A shortage of containers, for example, slowed the movement of goods and saw shipping costs surge. Those shipping costs peaked in late 2021 and have since come down, but Omicron and related widespread staff absences are now creating more challenges in the supply chain. This has blown out processing times at ports, hampered the return of containers to Asia and generated delays along the entire global shipping chain. As a result, the Global Supply Chain Pressure Index remains at a record high.

Chart 1: Global Supply Chain Pressure Index

Source: Bureau of Labour Statistics; Harper Petersen Holding GmbH; Baltic Exchange; IHS Markit; Institute for Supply Management; Haver Analytics; Bloomberg L.P.

Might Australia be immune to these global price pressures?

We have been holding out, but according to the ABS, price growth is now starting to pick up. In fact, today’s CPI release showed price growth of 1.3% in the December quarter and 3.5% through the year, placing it now over the RBA’S 2-3% target, with underlying inflation (trimmed mean) of 2.6% - its highest since 2014.

Clearly, inflation is starting to peek over the wall in Australia, and its impact is larger in some of the areas affected by supply chain pressures. Transport prices in particular have risen by 12.5% over the past year, reflecting both the rebound in oil prices and the higher costs coming through heavily disrupted supply chains.

Chart 2: CPI growth over past year by major group

Source: ABS Consumer Price Index

Today’s CPI result will place more attention on the RBA over coming months. Central banks overseas have already started to unwind bond-buying programs and markets are now anticipating three rate hikes by the US Federal Reserve this year.

But here, the RBA may still be able to afford to wait a little longer before it starts to lift rates. Some signs suggest global price pressures may ease post an Omicron peak – or at least not get much worse. New capacity is also coming online to ease pressure on shipping routes, and supply is also hitting LNG and oil markets, and containers are gradually freeing up.

More than that even, wages – a key driver of sustained inflation – continue to lag prices. And that means real wages are actually falling in Australia. This is despite extreme labour market pressure, with job vacancies at record highs. But wages tend to move slowly because most workers in Australia are on agreements that span several years. So even if we do see pockets of strong wage growth emerge, it’ll take some time before that flows through the whole economy.

Even with today’s result, price pressures remain lower in Australia than elsewhere, which may mean that rate rises are still some time away. But if that’s the case, there is every chance the consequences will be seen in some further depreciation of the Aussie dollar. Falling commodity prices, a slowing China and a relatively harder hit from Omicron in Australia than elsewhere may all lump downward pressure on the $A through the year.