Tomorrow the Australian Bureau of Statistics will release inflation data for the June quarter (and the 2020-21 financial year), and it’s expected to be the biggest in years. According to Moody’s, June quarter CPI will show a 3% annual rate — or according to the AMP’s Shane Oliver, as high as 3.9%.
Part of that is statistical: the -1.9% figure from the pandemic June quarter last year will drop out of the annual figure tomorrow, so there’ll be a big rise in the annual rate anyway. But the quarterly figure for June 2021 is also expected to show a sharp rise of 0.8%, reflecting a 7.5% surge in petrol prices, higher electricity prices in WA and some pick up in dwelling purchase prices and rents.
“Underlying inflation will likely accelerate reflecting supply constraints and strong demand to +0.5% quarter on quarter and an annual rate of 1.6%,” Oliver suggested. Producer price inflation is also likely to rise, due to higher commodity prices, when that figure is released on Friday.
Normally, those kind of numbers would unleash a chorus of “rate rise looms” and the inflationistas would be going berserk in the pages of The Australian Financial Review. But we know that the economy is likely to not grow at all this quarter — best case scenario — or shrink noticeably, courtesy of half the population being back in lockdown thanks to Gladys Berejiklian’s go soft, go late, go nowhere strategy in Sydney.
Last week saw a spate of forecasts for the current quarter changed from a flat result to a contraction by as much as 0.7%. They come after a bigger than forecast slump in retail sales in June and sharp contraction in the pace of activity in the economy in the early weeks of July.
Which means we’ll have something we haven’t had for a very long time — so long you’d have to go back to your year 10 commerce textbook to read about it: stagflation.
Stagflation was the supposedly mutually exclusive problems of inflation and stagnation occurring at the same time — a phenomenon that began to beset Western economies in later 1960s and then especially in the 1970s. The decade from 1972 to 1982 is generally held to have seen peak stagflation in Australia — in fact it was as Australian as Lillee and Thommo, Skyhooks, sherbet, Gough Whitlam, bad hair and bottom-of-the-harbour tax rorts.
This time around, we’ve got an inflation spike while GDP is likely to contract and unemployment rise this quarter thanks to lockdowns, especially in Sydney, where the construction industry has been paused for a fortnight.
But the trip back to the ’70s isn’t likely to last long — though some are starting to mutter about a Sydney-led December-quarter contraction, which would mean a technical recession, we’re still likely to see a rebound as Victoria and South Australia reopen, while temporary inflation pressures subside.
But even with a rebound, it will still put a big hole in the Reserve Bank’s aims to boost inflation and wages growth by 2024. The high inflation number means real wages will have gone backwards, perhaps by up to 1%, in 2020-21.
We’re already seeing evidence of a contraction this quarter: last Friday’s Markit flash survey of activity in the manufacturing and services sector slumped from a very solid 56.7 in June to 45.2 in July, which was a 14-month low and the first contraction since August 2020. Markit said the slide in activity into a sharp contraction (below a reading of 50) came in both manufacturing and services.
With the Sydney lockdown looking likely to continue well into August and possibly September, the contraction is looking more substantial by the day. Anyone got a copy of Living in the 70s?
This article was first published by Crikey.