Unemployed workers may be signalling a turning point for inflation in Australia

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Inflation in Australia, at least according to official measures, has been incredibly low in recent years.

A combination of high household indebtedness, record-low wage growth, intense competition in Australia’s retail sector and falling commodity prices has acted to suppress price pressures, leaving the Reserve Bank of Australia (RBA) little choice but to cut interest rates to the lowest level ever recorded.

However, perhaps the tide is turning.

Australians think inflationary pressures are likely to build over the next couple of years.

Just take a look at the chart below for evidence.

Source: Roy Morgan Research

From Roy Morgan Research, it shows annual inflation expectations looking two years ahead.

While estimates from the average person tends to overstate official readings from the Australian Bureau of Statistics (ABS) by some margin, it’s clear Australians think that inflation is likely to pick up again in the years ahead.

In November, the average inflation rate over the next two years was 4.5%, up 0.6 percentage points from the levels reported one year earlier.

Although not a large increase, it suggests that many Australians fell like price pressures are starting to build again.

And that’s especially the case for unemployed Australians, a cohort that’s likely to keep a closer-than-usual check on price changes that they’re seeing.

In the latest survey, Roy Morgan Research found that unemployed Australians expect inflation to average 5.9% over the next two years, substantially higher for those currently in work who think inflation will average only 4.4% over the same period.

Just have a look at the disparity between inflation expectations by employment status, shown in the next chart below from Roy Morgan Research.

Source: Roy Morgan Research

The most interesting feature of this chart is that compared to last year, unemployed Australians think that inflationary pressures are building significantly faster than other groups.

Only a year earlier, those out of work saw inflation averaging only 3.8%, around the same level as those in employment.

So what’s happened this year to explain the surge in expectations among unemployed Australians in the years ahead?

Could it be that this group, well aware of price movements with no income from employment coming in, are noticing that prices are increasing faster than others?

No one knows that answer for sure, but it is a sign that after surprising to the downside for so many years, 2018 could be a year when headline consumer price inflation will surprise to the upside.

We’ll get a first chance to test that theory later this month with the ABS scheduled to release Australia’s December quarter inflation report on January 31.

The Roy Morgan Research website has more on the inflation expectations report.

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