There are a lot of smart people I interview on my podcast “Lead-Lag Live” who are adamant that we will face several waves of high inflation, and that the battle against higher prices is nowhere near done. I’m personally skeptical of this, given the very real potential that the Federal Reserve already overtightened relative to demand pull and cost push inflation (something I argued recently here on InvestorPlace). I could be wrong here, and Australia may be a warning to all those that central banks aren’t done just yet.
Australia’s proactive approach to monetary policy may serve as a blueprint for other nations. While central banks worldwide remain hopeful that their respective inflation rates will return to normal levels by the end of 2024, the Reserve Bank of Australia (RBA) offers a starkly contrasting perspective, one that emphasizes the potential for persistent inflation over the next two years.
What We Can Learn From Australia
The RBA’s governor has been clear about the risks of inflation, citing it as a driving factor behind the central bank’s recent decision to end its policy pause and resume rate hikes. This decisive move reflects a departure from the widespread expectation that cooling global demand and fatigued consumers will naturally alleviate pricing pressure.
The sticky inflation narrative has held firm for some time, but Australia’s case serves as a sobering reminder that the trajectory of economic forecasting is not always predictable. The Australian model, with its emphasis on adaptability and proactive policy decisions, provides an alternative narrative in the global conversation about inflation management.
In the 1970s and 1980s, Australia grappled with high inflation, a scenario that negatively impacted the economy and distorted investment incentives. The nation’s centralized wage-bargaining system exacerbated the inflation problem, as it led to widespread wage hikes. However, by the early 1990s, the country had brought its inflation down to manageable levels, thanks in large part to a firm monetary policy and a severe recession.
To maintain these low inflation rates, Australia adopted an inflation-targeting framework. This strategic move locked in low inflation and set a clear medium-term objective for the country’s monetary policy. Under this framework, Australia’s inflation performance has been noteworthy, particularly when compared with other countries such as New Zealand. The benefits of low inflation are manifold, impacting everything from investment incentives to wage growth. However, the Australian experience also underscores the challenges and complexities associated with inflation management. Addressing these issues requires a delicate balance of policy measures, economic forecasting, and adaptability.
The Bottom Line
As we move into the next 12 months, the effectiveness of Australia’s approach to inflation will be under global scrutiny. Will the RBA’s expectations of persistent inflation prove accurate? Will the recent resumption of rate hikes help stave off the risks of a second inflation wave? I have no idea, but the point here is that Australia may serve as a warning that the Fed isn’t done just yet.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
