Global inflation is likely to stick around, RBA says, as wages and business lending come to the fore

Global inflation is “high and is likely to remain so for a while”, but the outlook for domestic business investment and wage growth remains somewhat positive, the Reserve Bank of Australia said Friday.

The central bank today released its quarterly Statement on Monetary Policy, as major economies worldwide battle growing costs and the likelihood of sharpening interest rate hikes.

The lingering economic and logistical impacts of COVID-19, plus conflict in Ukraine, have rattled supply chains and boosted the cost of fuel, food, and commodities worldwide.

Those pressures are apparent in the local market, where headline inflation hit 5.1% in the March quarter, and is now projected to near 6% by the end of 2022.

“The outlook for inflation is also materially higher than envisaged three months ago,” the RBA said today.

That recent uptick was instrumental in the RBA’s Tuesday decision to lift its cash rate target from a record-low 0.1% to 0.35%.

Lending expectations

Although that heightened cash rate target is already elevating the cost of business loan repayments, the RBA today recognised mixed sentiments from industry participants.

“An upswing in non-mining business investment is expected to resume in the period ahead, after pausing in the second half of 2021,” the RBA said.

“Growth in business debt remains strong.”

“Some banks expect lending growth to remain strong over the coming year, owing to generally positive economic conditions and high levels of M&A activity over the past 12 months,” the central bank added.

Industry experts say that borrowers can expect credit to remain available in the months ahead, even if banks reassess their lending criteria.

However, “others have noted that economic uncertainty, rising input costs and expectations for rising interest rates may contribute to some slowing.”

Small business lending had remained relatively flat over the March quarter, the RBA noted.

Wages growth in focus

Wages growth, another key focus for the central bank, came under scrutiny in the Friday report.

“Despite low unemployment rates, wages growth has not kept pace with inflation, so real wages have declined — in some cases noticeably,” the RBA noted.

Wage growth to date is only approaching its sluggish pre-pandemic levels, the RBA says.

Yet some positive signs exist for workers in high-demand fields.

“Labour cost pressures are building, however, with an increasing share of liaison contacts now reporting that they are paying larger wage increases or that they expect materially higher wages growth over the coming year.

“Business surveys are also consistent with a pick-up in labour costs, as is the rise in job turnover.”

Returning to the fact inflation is handily outpacing wage growth, the RBA suggested workers could seek pay increases to keep up with the cost of living.

“However, it is difficult to predict how successful these efforts will be and, if they are, how quickly that could occur,” the report said.

“These uncertainties are salient in Australia, where there is little recent experience of how the labour market and inflation might behave when unemployment is as low as it is currently.”

A global perspective

As Australia tilts deeper into a high-inflation environment, global neighbours are facing similar pressures.

Prime Minister Scott Morrison made headlines in New Zealand this week when he contrasted Australia’s headline inflation rate of 5.1% to the 6.9% annual increase facing the nation’s Trans-Tasman neighbours.

“Look across the ditch in New Zealand, look across at Canada,” Morrison told reporters on Tuesday after the RBA announcement. There are “few places that people would rather be than right here in Australia,” he added.

The Reserve Bank of New Zealand lifted its cash rate by 50 basis points to 1.5% in April, marking its largest single increase since 2000.

“There is an elevated level of uncertainty created by the persistent impacts of COVID-19,” the central bank noted, along with the knock-on effects of conflict in Ukraine and its impact on global commodity markets.

Other regional player are facing sharp inflationary pressures.

China, Australia’s single largest trading partner, saw its consumer price index rise 1.5% in March. While the cost of purchasing goods and services do not appear to have grown as they have elsewhere, pricing pressures appeared more pronounced in the nation’s producer price index, which climbed 8.3%.

The volatile price of food, including cooking oil, chillies, and eggs, pushed Indonesia’s inflation rate to 2.64% in March, up from 2.06% a month prior.

Even the historically deflationary economy of Japan saw inflation rise to 1.2% in March. However that rise was not driven by long-sought after wage growth, but the cost of food and energy in a nation largely dependent on importation.

While far below the inflation rates of other nations, increasing costs are already squeezing Japanese citizens on the margins. A draw-down of household savings to meet rising prices — akin to the buffer accrued by many Australians — has been smaller than hoped.

The United States headline inflation rate of 8.5%, and the Federal Reserve’s Thursday decision to hike its cash rate target 50 basis points to .75%-1%, has battered investor confidence.

The stock market valuation of tech giants like Google, Amazon, and Apple, tumbled in response. More than a trillion dollars in tech stock value vanished, as traders shunned growth stocks viewed as risky prospects in a highly inflationary environment.

Canada — the other target of Morrison’s comparison — registered annual inflation of 6.2% in March.

In the UK, the cost of energy and food has elevated inflation to 6.2%. That spike led the Bank of England to hike rates from 0.75% to 1% on Thursday, a 13-year high.

In a grim note, the institution projected inflation to reach 10% in the final quarter of 2022, with broader economic havoc on the cards: unemployment could rise to 5.5% in three years’ time due to a “sharp slowdown in demand growth,” it said.

Inflation is rife in other major European economies, with France, Italy, and Germany registering March rates of 4.5%, 6.5%, and 7.3%, respectively.

All told, these economic fluctuations could reflect on Australia’s economy, too.

“Overall, growth in Australia’s major trading partners in 2022 and 2023 is forecast to be around 4 per cent, which is below its pre-pandemic decade average,” the RBA said.