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Is there a better way to calculate inflation? Coz it seems like these interest rate hikes aren’t working as well as the RBA would like!!! - Justine
Thanks Justine for sending in your questions for our expert Gareth Hutchens, here's his answer:
There are a couple of points to make here.
Firstly, there are different ways to measure inflation.
But the inflation the RBA is targeting refers to the prices faced by households when they buy goods and services for consumption.
Consumption accounts for more than 50 per cent of Australia’s economy activity, so the RBA is trying to stamp down on price pressures inthatpart of the economy.
This measure of inflation doesn’t include the price of pre-existing residential property. So, the soaring property prices we’ve seen during the pandemic era (and more recently, the property price declines we’ve seen), aren’t considered inflation. They’re asset prices, so they’re counted in measures of wealth instead, rather than inflation.
Secondly, we’re all impatient to see inflation falling but it’s going to take time unfortunately, under current policy settings.
According to the RBA, it could take between 18 and 24 months before we see the full effect of its rate hikes on economic activity. That’s because there are lots of dynamics at play.
It will take time for the rate hikes to flow through to all residential mortgages. It will take time for businesses to adjust to a higher level of interest rates. It will take time for households to adjust their spending behaviour to the higher rates.
Thirdly, you may be wondering if there are faster ways to bring inflation down, or alternative ways other than just relying on interest rate increases.
Well, take a look at what’s happening in Western Australia.
In Perth in the September quarter, inflation declined by 0.5 per cent, while all other capital cities saw positive inflation. And for the last 12 months, Perth’s annual inflation, at 6 per cent, has been the slowest of any major city in Australia.
That’s because WA is using different policies to combat inflation. WA has a gas reservation policy, which provides cheaper energy. And the WA Government’s most recent budget had cost-of-living measures, like a $400 energy bill credit for households, which has kept inflation much lower over there.