Inflation in Australia: A Rapid Decline Mirroring Its Ascent

⚡️ Highlights:

1. Inflation is expected to fall globally in 2024, including in Australia. Major industrial countries are experiencing inflation rates of around 3%, while Australia’s inflation rate is around 5%. This trend is expected to continue as supply chain pressures reverse, demand cools, and labor markets ease.

2. Central banks in the US, Canada, and Europe are likely to start cutting rates in March or the June quarter.

3. The Reserve Bank of Australia (RBA) may have peaked in terms of interest rate hikes, and falling inflation should prevent further rate hikes. The RBA is expected to start cutting rates in the middle of the year, bringing the cash rate down to 3.6% by the end of the year.

4. Australia’s CPI inflation has lagged behind that of other developed economies due to the delayed emergence from COVID-related restrictions in 2021. However, the disinflation occurring in the US, Europe, and Canada suggests that Australia’s CPI inflation will also decrease, albeit with a lag.

5. Interest rate cuts in the second half of 2024 are likely due to a global oversupply of goods and a weakening labor market in Australia. The oversupply of goods is causing deflationary pressure, while the labor market is expected to weaken due to high rates of labor supply and easing demand from employers.

The key risk to this outlook is potential disruptions to supply chains if Houthi militants in the Middle East expand their attacks on global shipping routes.

AMP Chief Economist Shane Oliver Forecasts a Decrease in Inflation and Interest Rates

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AMP Chief Economist Shane Oliver has provided an insightful analysis of the economic and investment outlook for 2024, focusing on the expected decline in global inflation. This trend is anticipated to prompt the Reserve Bank of Australia (RBA) to reduce the official cash rate (OCR) to 3.60% by the end of the year.

Key Observations and Predictions

  • Global Inflation Trends: Inflation rates in major countries have significantly dropped from their peaks of 8 to 11% last year to around 3 to 5%. Australia, which lagged in inflation increase, is also experiencing a decline, with inflation easing to around 5%.
  • Factors Contributing to Inflation Decline: The reduction in inflation is attributed to reversed supply chain pressures, cooling demand, and easing labor markets, including a sharp fall in job vacancies.
  • Central Banks’ Response: Central banks in the US, Canada, and Europe are expected to start reducing rates as early as March or the June quarter. Although there’s a risk of one more rate hike in Australia in February, falling inflation could prevent this, leading to rate cuts starting mid-year.
  • Australian Inflation Indicator: Oliver points out that Australia’s Inflation Indicator suggests a further sharp fall in inflation, aligning with the global trend.
  • Labour Market and Economic Implications: Australia’s labor market is likely to weaken due to high rates of labor supply and easing employer demand, leading to rising unemployment.

Potential Risks to the Economic Outlook

The primary risk to this outlook is the possibility of disruptions in global shipping routes, particularly if attacks in the Middle East escalate. Such events could impact supply chains and affect the availability of goods, potentially altering the predicted course of inflation and interest rates.

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The economic forecast for 2024 indicates a significant shift in inflation and interest rates in Australia, aligning with global trends. This change is expected to have a profound impact on the Australian economy, influencing consumer spending, housing markets, and overall economic growth.

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