Part one – Why are prices rising?
Inflation and rate rises are the flavour of the month. Everyone has a prediction. What is really going on? What is the cause, and what does it all mean. Follow our five-part series to understand the facts without the hype.
We have all heard it, we have certainly seen it at the fuel pump. Prices are rising. The big ‘I’ word. Inflation. Why are they rising and what is being done to stop it? More importantly, will it be effective?
There are two main drivers of the current inflation we in the grips of, and there is a reason this problem isn’t only being felt in Australia. The first is rising oil prices, which affects fuel, electricity, and transportation costs of all goods. Ie. Everything. The second is the global transportation backlog. This is leading to delays in the arrival of goods and their component materials, thus creating supply shortages in various sectors. This also has an upward push on prices as demand outstrips supply.
The oil problem is a simple one. The war in Ukraine has led to economic sanctions on Russia, which accounts for 10% of global supply, and of course panic buying. The war has also disrupted supply of Russian vegetable oil for biofuel, which adds to the problem. You can read more about global oil supplies and the effect of the war here and here. OPEC, which is, for lack of a better word, a global oil cartel, accounts for 40% of global oil production. OPEC has been slowly and steadily increasing output so that oil supply is expected to reach parity sometime between end of 2022 or early 2023. Thus, relieving one major cause of global inflation.
The shipping delay was caused by covid, but now is primarily the result of recent complete lock downs in Beijing and Shanghai. This caused essentially a traffic jam of shipping which isn’t expected to return to normal until 2024. Those I have spoken to in the industry anecdotally, all seem to agree that in Australia we will be through the worst of it by the end of 2023.
Given the above, most economists predict that inflation will begin to ease late in 2022 and we should see a relative return to normal by the end of 2023. All this of course, is in the absence of any further global upsets.