Inflation reached its highest point in 40 years in the US. Here’s what that could mean for Australia

While filling up his car at a petrol station in Orlando, Zachary Bolhouse was surprised when he looked over at the meter to see the number tick over to $US50. 

The 23-year-old barista drives to and from work every day and says he used to spend about $US36 at the pump a year ago.

"It isn't breaking the bank but it's still noticeable," he said.

"It's more expensive to fill up and it hasn't gotten better."

Energy prices have soared in the US over the past year — rising 6.1 per cent in both October and November before falling 0.5 per cent in December.

But consumers aren't just paying more at the petrol pump. Yesterday, the US Consumer Price Index (CPI) for December — which measures changes in the cost of food, housing, utilities and other goods as well as petrol — was up 7 per cent, the highest annual increase in nearly 40 years.

According to the Bureau of Labor Statistics, shelter, food and used cars and trucks, were the biggest contributors to the rise.

"I was looking up apartments recently … and a one bedroom, one bathroom in Orlando is like $US1,700, per month, which is crazy," Mr Bolhouse said.

"… The price of housing is ridiculous."

Rising inflation hasn't been limited to the US. Across developed economies it's tracking above pre-pandemic levels.


Data anlaysis from Pew Research Center from 46 nations found that in the period between July and September last year, the rate was higher for 39 countries than in the same period in 2019.

While prices aren't rising as fast here in Australia, people are still paying more at the supermarket, as they fuel up or when they are looking for a car.

The latest figures for the September quarter showed Australia's annual inflation now running at 3 per cent (seasonally adjusted).

So what's going on? The reasons why prices are rising are complex and varied and include among other things, computer chip shortages, bored consumers and an ever-shifting global pandemic.

But what the recent surge in prices really boils down to are issues with both supply and demand.

Blame the pandemic

According to AMP's head of investment strategy and chief economist Shane Oliver, many recent cost of living pressures are being driven by the pandemic.

Since March 2020, COVID-19 has disrupted international supply chains by shutting down factories, limiting travel and wreaking havoc on labour at almost every level of production.

"We hear about supply chain disruptions — where companies can't get the goods they need, can't get the parts they need to make something — and so that's slowed production right down," Mr Oliver told the ABC.

"And at the same time, people have been restricted from spending on services, like going to a restaurant or going on a holiday, so they've spent more on goods."

As life has resumed after strong uptake of COVID-19 vaccines in the US, demand has surged.(Reuters: Mario Anzuoni)

As a result, according to Mr Oliver, the combination of constraints on supply, and strong demand for goods, "has pushed prices up".

While prices fluctuate all the time, inflation can be hardest on those on low incomes or without any savings to fall back on, particularly if it isn't matched by wage growth.

In the US, while wages are increasing, real average hourly earnings actually decreased 0.5 per cent in October after accounting for inflation. It was a similar picture in Australia, with the Wage Price Index at 2.2 per cent in the 12 months to September, meaning living standards are effectively falling.

Basically, inflation outpacing wage growth means workers are buying less with what they earn.

Yet while the US Federal Reserve and others have predicted this inflation is only "transitory" as markets work through the kinks caused by COVID-19, there is some debate about how long this will last.

A COVID-fuelled spendathon

Consumer demand took a big hit early in 2020 as economies shut down, workers lost their jobs and residents were shuttered indoors due to COVID-19.

That quickly rebounded over the past year as restrictions eased and economies opened up again.

There were a few explanations for this, according to economists. One is that government policies, like the US Federal Reserve's decision to slash interest rates to near zero and pump billions into markets by buying up corporate debt, gave people more cash to spend.

As other countries adopted similar measures, these policies "provided a lot of support for household income through the lockdown," Mr Oliver said.

"That meant that people built up savings," he added.

While some saved, others who retreated indoors due to pandemic restrictions began to look around their homes and think about all the ways they could make their spaces more beautiful.

Inflation outpacing wage growth is another setback for workers still struggling to shake off the effects of the COVID-19 pandemic.(Reuters: Andrew Kelly)

As a result, there was a higher demand for things like furniture and building materials for renovations. Demand for computers and other tech also rose as more people moved to working from home arrangements.

There could also be a psychological explanation, according to Craig Austin, assistant teaching professor of logistics and supply chain management at Florida International University.

"What we're also seeing is that people feel they're owed something, they want to shop and buy things … to help cope with the uncertainty around them," Mr Austin told the ABC.

The sharp rise in demand didn't necessarily increase for services like restaurants, travel and entertainment, Mr Austin says, but largely for online goods like furniture, appliances and cars.

"… Many friends of mine no longer go to the grocery store to do their shopping, they go online," Mr Austin said.

Whether that trend will continue after the pandemic ends is difficult to predict, but what is clear is that the rise in demand for online goods also had wide-reaching implications on supply around the world.

The global supply chain is still a hot mess

Companies have struggled to keep up with the surge in consumer demand.

Part of that is a result of the pandemic wreaking havoc on global supply chains — disrupting manufacturers, ships, ports, trucks and the lives of the people making your goods and those delivering them to your door.

Factories have been shut down as part of country wide lockdowns or had their capacity slashed as the list of employees suffering from COVID-19 infections or spending time in quarantine has grown.

Shipping containers have become scarce and a shortage in certain components — such as computer chips — continues to delay production on goods from new cars to laptops.

Problems persist throughout the transport and logistics supply chain.(ABC News: John Gunn)

"If one component in [for example] a washing machine has a problem and it can't be obtained, then it slows down the whole production of washing machines, and that pushes prices up," Mr Oliver explained.

COVID-19 was a "black swan event" on the supply chain, according to Mr Austin, although problems existed long before the pandemic hit.

"When China closed its economy and a lot of other economies did as well, it disrupted the model [of 'just in time' delivery] that companies had been relying on before the pandemic," he said.

"Even though economies had disruption strategies in place, suddenly whole factories were offline.

"It affected everything. Whatever could be made, the quantity was significantly reduced."

Mr Oliver agrees it was a "big supply shock".

"And as the pandemic has gone on, it's become more of a supply shock than a demand shock," he added.

Problems persist throughout the transport and logistics supply chain, although there are signs in the US at least that major ports are clearing some of the backlog. In Europe, however, the problem has been made worse by the high costs for things like energy and fuel, according to Vox.

In the UK, the food and drink industry warned that the soaring cost of raw materials and ingredients was having a "terrifying" impact on consumer prices.

There has also been huge upheaval in labour markets around the world. Anxiety over getting COVID at work, unemployment benefits, as well as access to child care during school closures and other factors are all playing a role in delaying people from returning to work.

"You've also got this thing called the Great Resignation, which has prompted some people to retire earlier, or switch jobs, or focus more on quality of life as opposed to taking any job they can," Mr Oliver said.

"And … with governments provid[ing] a lot of support for household income through the lockdown, that meant that people built up savings [which has] given some workers a bit of choice as to whether they go back to work or … when they go back.

"So the supply of labour has been somewhat constrained relative to demand as well."

What will this mean for Australia?

The recent December figures reinforced suggestions the Federal Reserve may be raising interest rates soon. And the worry is that the Reserve Bank of Australia could follow suit, particularly if inflation begins to pick up here.

Mr Oliver is skeptical that could happen soon but says one implication of the US raising interest rates is that it may eventually put pressure on some mortgage rates in Australia.

Rising inflation in the US may also be an early indication of what we could see in Australia, with Mr Oliver pointing out there is a broad connection between inflation in the two countries.

"We don't see that month to month but over the years. Certainly we saw that in the period of the 1970s," Mr Oliver says.

"And rising prices in the US are consistent with what we're seeing locally in Australia … It's a bit more muted in Australia but certainly the same issues we're seeing driving prices up in the US – issues with the supply chain, consumer demand – are happening here as well."

The psychology around inflation is also important because if people expect inflation to rise, they might start making decisions that means that inflation becomes baked in.

Craig Austin, however, remains optimistic about where things are headed.

"Disruptions to the supply chain have always happened…," he said.

"The pressures are easing, not completely, but we're seeing more merchandise becoming available and a lot of places are improving."

He believes the pandemic has already changed the way companies operate — with some opting to buy their own containers or pursue other freight options.

In his words, "the stew [supply chain changes] has been made, it just needs time for the flavours to marry up".


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