Economic Review
Inflation – the dark and stormy cloud By Anneke Thompson*
Reflecting their rising risk profiles due to Australia’s higher inflationary environment, the Food and Beverage Services, Arts and Recreation Services and Transport, Postal and Warehousing Industries all recorded an increase in their probability of default. As inflation works through the economy, it is expected that consumers will reduce spending on discretionary items. Cafés, restaurants and the arts and entertainment sectors are all typically areas where consumers choose to spend less as their discretionary income declines.
What is causing inflationary pressures, and what can we expect going forward?
Anneke Thompson
High inflation is currently a global phenomenon, with various structural elements combining to create a perfect inflationary storm. High fuel costs as a result of the war in Ukraine is one major factor, impacting everything from shipping, trucking, air freight and manufacturing. Ongoing production and staffing issues associated with the Omicron wave are causing short term havoc. And global labour mobility has been severely impacted by COVID-19, with countries that typically import a lot of labour are reporting severe productivity constraints as they make do without these employees. Compared to other OECD nations, Australia’s inflationary curve is still relatively modest.
12 CREDIT MANAGEMENT IN AUSTRALIA • April 2022
The USA and UK are recording inflation between four and seven per cent. Combined, the OECD nations reached an average inflation rate of almost five per cent by Q4 2021. The steepness of the curve is particularly worrying, and Australia will look to avoid replicating other OECD nations by tightening monetary policy, likely very soon.
What does inflation mean for Consumer confidence? Rising prices and impending interest rate rises are weighing on consumers’ minds as much as COVID-19 did when it first went global in early 2020. In 2020, consumer confidence plummeted as the shock of the pandemic set in. However, massive amounts of government stimulus quickly reversed the trend, and, like it or not, most consumers settled into a life of online shopping, home renovations and lots of cooking! In Australia and the OECD, consumer confidence peaked around mid 2021, before the Delta wave arrived, and we realised that COVID-19 was not going away any time soon. Since then, the trajectory has been progressively worsening, as rising prices, Omicron and war in the Ukraine all add up. Importantly, most consumers have no come to expect that their home and personal loans are about to get more expensive, and this will curtail discretionary spending going forward.
