Looking at the latest media reports you would be forgiven for thinking that inflation had started to rapidly increase. While the talk at the beginning of the year was about inflation slowing and possible interest rate cuts later this year, now some of the financial talking heads are suggesting that interest rates need to rise, and Australia might even need a recession to get inflation under control.
How confused you would be then if you happened to stumble onto the Australian Bureau of Statistics website and see that annual inflation rate in the most recent quarter was down half a percent to 3.6%. Annual inflation has almost halved over the last year.
The sudden calls for higher interest rates as the inflation rate continued to fall was so jarring, even the unusually mild-mannered Treasurer, Jim Chalmers, called it an “overreaction”.
Some in the financial commentariat responded that the inflation rate wasn’t falling fast enough. That inflation was sticky and was at risk of stalling outside the RBA’s target range of 2% to 3%. Failing to get inflation back to the target range as quickly as possible, they claimed, was imposing huge costs on the economy and crippling household’s budgets through cost-of-living pressures.
The only problem with all of these claims is that they are misleading nonsense.
The rate of inflation is still falling. The rate at which it is dropping has slowed but that is to be expected. The rate of inflation is not going to crash down at great speed only to suddenly flatten out when it reaches the target band.