![]() They will then have to increase their prices further to cover the higher wages bill. If the cost of living rises, then you will seek higher wages this will then put further pressure on the costs for businesses. That’s all very well if your wages also rise, but if your income remains static then your standard of living will go backwards as you will have to spend more money to buy the same goods. Market pundits argue that if businesses must pay more for materials and running costs such as electricity then these increases will most likely be passed on to the consumer. After all, most world economies went backwards last year, so any growth should be viewed as a good thing and more than likely a temporary event.īut markets are not convinced. The central banks believe that once economies get over the kickstart from all the government stimulation, inflation will fall back into line. In addition, companies underestimated demand for their goods during the pandemic and as a result there are now bottlenecks in supply that are putting upward pressure on prices. So with inflation rising faster than anticipated, share and bond markets are on edge.īut just like the RBA, the Federal Reserve views this spike as temporary, pointing to it being a natural reaction after the fall in prices last year during the worst days of the COVID crisis. ![]() For instance, US inflation shot up to an annual rate of 5 per cent in May, the fastest pace since 2008, up from 4.2 per cent in April. As experienced investors would be aware, markets hate surprises. The situation is a little different overseas where inflation has spiked higher. The RBA has an inflation target of 2-3 per cent a year, which it regards as a level to achieve its goals of price stability, full employment and prosperity for Australia.Ĭurrently the RBA expects inflation to be 1.5 per cent this year in Australia, rising to 2 per cent by mid-2023. Until the inflation rate returns to the 2-3 per cent mark, the RBA has said it will not lift the cash rate. Inflation is a symptom of rising consumer prices, measured in Australia by the Consumer Price Index (CPI). Yet despite market rumblings, the Reserve Bank of Australia (RBA) appears quite comfortable about the outlook. Fears of a resurgence in inflation has been the big topic of conversation among bond and share market commentators lately, which may come as a surprise to many given that our rate of inflation is just 1.1 per cent.
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