Australia has found itself grappling with a persistent economic trend in 2024: sticky inflation.

Why so sticky you say?

Sticky inflation differs from the more traditional types of inflation – primarily in its persistence. While inflation rates typically fluctuate in response to specific economic factors such as supply chain disruptions or changes in demand, sticky inflation persists despite attempts to mitigate it through conventional methods (like changes to interest rates).

As of 2024, several factors are contributing to this economic challenge, which requires a nuanced analysis to comprehend fully.

Historically, Australia has been known for its robust resource-based economy and resilience in the face of global economic shifts. This vigour saw the economy escape the global recession on the back of the Global Financial Crisis. Currently, Australia faces a unique set of circumstances.

Since the recovery from the COVID-19 pandemic, various global and domestic factors have converged to influence the inflationary pressures experienced by the country.

One of the primary drivers of this sticky inflation is the ongoing disruptions in global and domestic supply chains. These disruptions, exacerbated by geopolitical tensions, sharp increases to energy prices and lingering effects of the pandemic, have led to shortages and delays in the delivery of crucial goods and raw materials. As a result, businesses in Australia face higher input costs, which are being passed onto consumers in the form of higher prices for food products, finished goods and services.

Another critical factor which could be contributing to sticky inflation is the tight Labour market with shortages putting pressure on wages. In recent years, Australia has seen an increase in demands for higher wages from various sectors, driven by labour shortages, particularly in industries on skilled migration. While higher wages can potentially stimulate consumer spending and economic growth, they also contribute to inflationary pressures when businesses pass on these higher labour costs to consumers. However, the notion that sticky inflation in Australia is primarily driven by wages overlooks the complex relationship of factors influencing price levels in the economy.

So how do we fix the stick?

The Reserve Bank of Australia (RBA), tasked with maintaining price stability and full employment, continues to face challenges in navigating these inflationary pressures. The concerns that inflation is not falling fast enough is putting pressure on the Reserve Bank to potentially raise rates even further. The RBA has hinted at a potential rate rise/rises over the next 6 months to finally fix the stick. However, given that the estimated economic growth over the March quarter was 0.1%, the RBA will need to walk a very fine line to not over tighten the reigns as it could lead to a further slowing of the economy – Perish the thought… ‘the recession we had to have’ 2.0.

As Australia continues to navigate through these challenging ‘sticky’ inflationary periods and the longer inflation remains above the RBA’s target range, the harder it will be for the RBA to avoid raising rates again.