Australians have seen the price of almost everything increase in the past two years. And, according to EY, they’ll remain that way permanently.
The price increases on most products and services have been ‘marketed’ as a biproduct of temporary pandemic disruptions and staff and supply issues caused by Omicron.
However, EY chief economist Jo Masters says that even after supply chain and workforce disruptions ease, consumers should prepare to keep paying higher prices for services such as home maintenance and healthcare, and other goods such as meat.
Supply disruptions are easing and the trend is expected to continue this year. Already, the transport price of bulk dry goods has come down almost 40 per cent over the past month. The reopening of the international border will also help alleviate input cost pressures.
But Ms Masters does not expect prices to fall any time soon – if at all.
“Prices for audio, visual and computing equipment, and motor vehicle prices tend to fall relatively frequently, we call these sticky-up,” she told AFR.
This means, once supply pressures ease, prices should revert to pre-pandemic levels.
But this rationale won’t apply to ‘sticky-down’ goods and services, such as home building, maintenance and repair, childcare, healthcare and some meat products.
Once these prices are pushed higher, they are less likely to come down, says Ms Masters.
Headline inflation rose 3.5 per cent last calendar year, and non-discretionary inflation, which covers things such as petrol and healthcare, rose by 4.5 per cent.
Prices of products that had faster than normal price growth over the past 12 months and fall into the ‘sticky-down’ category as well as the non-discretionary basket are highly unlikely to come down post-COVID.
Older Australians can expect to pay the same or more for home building and repair, meat, and financial services, and potentially for clothing and footwear, hairdressing, restaurant meals, recreation and sporting and cultural services.
Home building, maintenance and repair, in particular, recorded such strong growth that “history suggests these price gains are unlikely to be unwound”, said Ms Masters.
“A large number of the items driving the rise in inflation lately are items that are sticky-down and therefore unlikely to have a deflationary contribution, even once supply chain issues are resolved.
“The easing of supply chains is unlikely to drive aggregate prices lower, although it will slow the rate of price inflation. In other words, resolving the supply disruption is more likely to be disinflationary than deflationary.”
Ms Masters said these factors will likely lead to cash rate increases sometime soon.
“All of this points to our view that the prospect of the first rate hike coming in 2022 is more than just ‘plausible’,” she said.
Reserve Bank of Australia governor Philip Lowe said just three months ago that a rate rise in 2022 was “very unlikely”.
However, falling unemployment and inflation that lifted to 2.6 per cent – the halfway mark of the bank’s 2 per cent to 3 per cent target – suggest that increases to the current record low 0.1 per cent overnight cash rate were “plausible” this year.
The RBA maintains it is taking a cautious approach and wants to see whether easing of disruptions sustainably flow through to prices before lifting interest rates.
“We can’t rule out the possibility that some of the recent price increases are reversed as a more normal balance between supply and demand is re-established,” said Dr Lowe.
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