Strange US factor that will affect Australian inflation

Strange US factor that will affect Australian inflation

Since the resurgence in global inflation in 2021 first began to rise above central bank targets, Australians have been able to look around the developed world and say, “At least ours isn’t as bad as (insert country here)”.

While that remains the case when one contrasts Australia with most nations in Europe, which has been hit hard by energy prices due to the war in Ukraine and the geopolitical tug-of-war that has ensued, there are already nations like Canada producing a rising lower year – on-year inflation numbers than Australia.

With annual Australian inflation being widely tipped to 8 per cent by the Treasury, the RBA and some of the big banks when the next quarterly CPI figures are released in January, it increasingly appears that Australian inflationary pressures will soon exceed those seen in the United States .

According to the latest data for the two respective nations, Australian inflation is now 0.4 percent below the 7.7 percent yoy figure recorded in the United States in October.

A strange but very important factor

In a strange twist of fate, everything from the future direction of US inflation to Australian house prices could depend on the price of American used cars.

It sounds kind of crazy giving so much weight to what would otherwise be a forgotten or relatively insignificant contributor to the US CPI.

But here we are.

Amid the impact of supply chain issues, pandemic-driven demand, and trillions of dollars worth of government stimulus targeting homes, demand for used cars in the United States rose to such a degree that manufacturers and dealers simply couldn’t keep up.

Between early 2020 and the peak in US used car prices in January 2022, used car prices rose a whopping 54.5 percent, according to the US Bureau of Labor Statistics.

Unlike Australia, where used cars make a very negligible contribution to CPI and headline inflation, used cars account for 4.14 percent of headline inflation in the United States.

While that doesn’t sound like much, at its peak contribution to headline inflation in June 2021, 1.88 percent of the headline inflation rate of 5.4 percent year-on-year was entirely due to rising used car prices.

But as the saying goes: what goes up must come down again.

According to the Mannheim Used Car Price Index, US used car prices have fallen 15.4 percent since peaking in January and continue to fall rapidly.

US inflation to fall on used car prices

As used cars begin to push US headline inflation numbers higher year-over-year, the big question is how much used car prices will fall and how that will feed into the US CPI.

There are a number of different scenarios to consider, each with a different impact on inflation and its knock-on effects.

If we assume inflation-adjusted used car prices return to roughly pre-pandemic levels over a 12-month period, US inflation could fall 1.05 percent year-on-year.

If they fell to pre-Covid levels and there was no boost from higher inflation and higher wages, they could subtract 1.33 percent from headline inflation year-on-year.

But let’s take it to the extreme, let’s imagine prices not only returning to their pre-Covid trend, but also falling as sharply as they did during GFC from their pre-Covid base. If this scenario played out over a 12-month period, used cars could lose 1.67 percent of the headline count.

Based on this number alone, US inflation could drop to as much as 6.0 percent over the next 12 months, should the extreme worst-case scenario materialize.

Transpacific Inflation War

With US inflation set to face this and other headwinds such as lower rental inflation in 2023, it increasingly looks like Australia is taking the crown of high inflation from its American counterpart.

In the meantime, Australian inflation has yet to price in something like the increases in rental prices seen in reports from private property data providers such as SQM Research or PropTrack, all of which can be seen in the Australian CPI to 2023 and maybe beyond.

There is also the Treasury Department’s prediction that energy bills could rise by as much as 56 per cent for the rest of 2022 and into 2023, which will add significantly to Australian inflation if it happens.

Although Australia has avoided the worst since this latest wave of global inflationary pressures began, it appears Australia is just lagging behind rather than dodging another economic bullet.

go forward

If US is used because prices are collapsing, as some industry sources are warning, then US inflation could fall significantly, perhaps even to the point where the Federal Reserve might consider its tightening approach to monetary policy.

But for Australia, the domestic inflation landscape lacks the same headwinds as its American counterpart, and still has to price in big rental inflation that has been planned for over a year.

The US Federal Reserve is the global benchmark for interest rates and its Chairman Jerome Powell is the driving force behind interest rate policies around the world and any relaxation of tightening policies would have an impact on Australia.

Ultimately, we’ll just have to wait and see how this factor and others play out as the battle over whether or not the future will be inflationary will be decided by the data in the months and years to come.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator

#Strange #factor #affect #Australian #inflation

Leave a Comment

Your email address will not be published. Required fields are marked *