Trends in Australia’s Inflation
Expert reviewed • 14 August 2024 • 10 minute read
Recent Trends in Australia's Inflation
Australia's inflation has undergone significant changes over the past few decades. Here is an overview of the trends in recent years:
The Low Inflation Era (2000-2009)
During this decade, Australia experienced relatively low and stable inflation, largely within the RBA's target range. Globalisation, technological advancements, and strong monetary policy contributed to this stability. The average inflation rate in Australia between 2000 and 2009 was approximately 2.8% per year. However, this period included a few notable fluctuations, such as a significant spike in inflation to around 6.1% in 2000 due to the introduction of the Goods and Services Tax (GST) and a peak of 4.4% in 2008 amidst the global financial crisis. However, the overall average remained within the Reserve Bank of Australia's target range of 2-3%.
Sustained Low Inflation (2010-2019)
The trend of low inflation experienced in the early 2000s continued into the 2010 decade. Overall, the period from 2010 to 2019 was characterised by relatively low and stable inflation, with occasional deviations below the RBA's target range, primarily due to external economic factors and subdued domestic wage growth. Thus, the average inflation rate between 2010 and 2019 was approximately 2.29% per year. This is within the RBA's target band of 2-3%. One of the most notable deviations from this trend, however, was in 2019 (the start of the Covid-19 pandemic), where inflation dropped to 1.8%.
Recent Inflation Trends (2020-2023)
The recent period has witnessed significant volatility in inflation rates. In 2020, Australia experienced deflationary pressure with an annual inflation rate of 0.9%, primarily due to COVID-19 lockdowns, reduced consumer spending, and government interventions such as free childcare. The following year, 2021, saw an inflation rebound to 3.5% as economic recovery took hold, accompanied by supply chain disruptions and a rapid increase in demand. In 2022, inflation sharply increased, peaking at 7.8% in the December quarter - the highest rate since 1990 - driven by a global energy crisis, continued supply chain issues, and labour shortages. As of 2023, there are signs of gradual moderation, with the inflation rate in the June quarter dropping to 6.0%, though still remaining above the Reserve Bank of Australia's target range.
What are the Key Factors Influencing Recent Inflation Trends?
Recent inflation trends in Australia are represented by sharp increases, with inflation reaching an extreme high of 7.8% in December 2022. This has, however, dropped to 4% as of May 2024 (still above RBA target). The key factors which have caused these trends are as follows:
- Global Supply Chain Disruptions: The COVID-19 pandemic severely disrupted global supply chains, causing shortages and price increases for many goods. For example, semiconductor shortages have significantly impacted the electronics and automotive industries, leading to higher prices and reduced availability of products like smartphones, computers, and new vehicles.
- Energy Prices: Energy prices have been highly volatile, affecting overall inflation rates. Oil and gas prices surged due to geopolitical tensions and supply constraints, increasing transportation and production costs across various sectors.
- Housing Market: Australia's housing market has seen significant price increases, both in property values and rents. This is partly due to low interest rates (until recently) stimulating demand, as well as supply constraints in desirable areas. Construction costs have also risen sharply due to material shortages (e.g., timber, steel) and labour constraints, further driving up housing-related inflation.
- Labour Market Tightness: The low unemployment rate of 3.7% (as of July 2023) indicates a tight labour market. This has led to upward pressure on wages as employers compete for workers, particularly in sectors facing skills shortages. While beneficial for workers, rising wages can contribute to inflationary pressures as businesses may pass on increased labour costs to consumers.
- Monetary Policy Response: The cash rate rose from a historic low of 0.1% in May 2022 to 4.1% in June 2023. These rate hikes are designed to cool demand and bring inflation back within the RBA's target range, but their full impact on inflation may take time to materialise.
- Fiscal Policy Measures: Government stimulus during the pandemic, such as JobKeeper and increased welfare payments, helped support the economy but also contributed to inflationary pressures by boosting demand. As these measures are gradually withdrawn, their inflationary impact is expected to diminish.
Sectoral Differences in Inflation
Different sectors of the economy have experienced varying levels of inflation. Some sectors have experienced significantly more inflation than others, shedding light on weaknesses in economic policy in protecting some sectors. For example, the Australian housing market had a 7.7% annual increase from June 2022-2023, whereas the transport sector only had a 2.7% increase. Other notable sector increases include:
- Food and Non-Alcoholic Beverages: 7.5% annual increase
- Health: 3.7% annual increase
- Education: 4.7% annual increase