Inflation and interest rates: We are not the US

By reading any of the mainstream financial press across the past twelve months you would have undoubtedly heard that interest rate rises were important, nay, essential, for lowering persistently high inflation. 

Afterall, consumer prices have been rising rapidly, and as conventional wisdom suggests, the way to reign in prices is through lifting interest rates.

However, as we argue in the latest edition of our Emerald Financial Group podcast, there are few mechanisms by which raising interest rates in Australia will reign in the most rapidly rising prices.

Instead, we believe that lifting interest rates too rapidly has the potential to damage the economy, while doing little to affect things like oil prices, transport costs, and import prices, which are some of the major drivers of our current consumer price growth rates.

Without a strong mechanism for interest rates to affect these prices, we risk creating the conditions of stagflation in the local economy. Luckily enough, the Reserve Bank of Australia (RBA) doesn’t disagree with me; in each of his recent speeches, RBA Governor Philip Lowe has been at pains to remind the bond market that we are not the United States, and that the pace of gains in rates is likely to be slower in Australia.

Watch the latest edition of our EFG Podcast to hear more about inflation and to receive a stock tip that we think could outperform in this environment.