As inflation in the world’s richest countries hits a 25-year high, pressure mounts on the RBA to raise interest rates

As inflation in the world’s richest countries hits a 25-year high, pressure mounts on the RBA to raise interest rates
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  • Inflation in the biggest economies in the world has hit a 25-year high, according to the OECD.
  • Globally, fears around inflation are increasing pressure on central banks to raise interest rates.
  • If pressures in Australia follow those in other OECD nations, the RBA may raise its rates sooner than the late 2023 or 2024 timetable previously signalled.
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Inflation in the richest countries in the world has hit a 25-year high, according to the Organisation for Economic Co-operation and Development (OECD).

Globally, fears around inflation are increasing pressure on central banks to raise interest rates in response to record highs in advanced economies. 

In Australia, economists have warned in recent months that rising inflation will lead to a ‘more volatile’ market in 2022, and business and retail industry groups have told consumers to prepare for price increases to persist over the next nine to 18 months.

The annual pace of consumer price growth in the OECD group of developed nations hit 5.8% in November, according to data released on Tuesday, up from just 1.2% in the same month the previous year and the highest rate since May 1996.

The increase was driven by energy prices, which leapt by 28%, up more than three percentage points from the previous month to the highest rate since June 1980. 

Food price inflation across OECD nations also grew to 5.5% in November, up from 4.6% in the previous month.

In the US, Europe and the UK, inflation is running at more than double the 2% target set by their central banks.

While Australia fared better than comparably rich nations, the country still saw consumer price inflation increase by 3% over the year to the September quarter of 2021, driven by fuel prices and home-building costs.

Surging inflation threatens to force interest rates up

Since the start of the pandemic, supply chains have come under strain from an avalanche of compounding factors including increased demand for goods, infection of workers, global shipping container shortages, and rising freight costs — pushing up inflation and placing pressure on businesses to respond with increased consumer prices. 

In November, the ACCC warned that supply chain disruptions would likely continue to force Australian businesses to pass on costs to consumers. 

Now, the rapidly spreading Omicron variant is likely to further fuel inflation, along with wages.

In the US, the chair of the Federal Reserve warned that high inflation poses a “severe threat” to a recovery in the nation’s jobs market.

This follows a warning from the governor of Germany’s central bank that inflation could remain high for longer than economists expect. 

Locally Inflation combined with the new COVID-19 surge is set to test the RBA’s interest rate position. 

If prices and wages pick up faster in Australia like the rest of the world, interest rates would need to rise sooner than the late 2023 or 2024 timetable the RBA has previously signalled.

Shane Oliver, chief economist at AMP Capital, projected rate hikes by Australia’s Reserve Bank and its international counterparts as the likely result of surging inflation. 

“Inflation, the start of Fed rate hikes, the US mid-term elections and China/Russia/Iran tensions are likely to result in a more volatile ride than 2021,” Oliver wrote in his end-of-year forecast.

Similarly, CommSec economists said in an end-of-year research note that while central banks initially thought that the spike in consumer prices would be temporary, owing to supply disruptions and pent-up demand in lockdowns, this has not been the case.

“Policy chiefs, including US Federal Reserve Chair Jerome Powell, have since back-pedalled from labelling price rises as ‘transitory’ with annual inflation rates hitting multi-decade highs — well in excess of central bank targets of around 2 per cent,” the note said. 

The inflation rate in Australia is expected to reach 3.2% by the end of this quarter

In the long-term, the Australian inflation rate is projected to trend around 2.3% in 2022 and 2.5% in 2023.