Oz Consumer Inflation Expectations At Record High

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By Rudi Filapek-Vandyck

Westpac economists report consumer inflation expectations have hit a record high in the second quarter of 2008 at the same time as the Reserve Bank became more relaxed about future inflation projections and started to cut official interest rates in September.

So how to explain this apparent paradox?

Westpac economists suggest one has to view the consumer sentiment in combination with what happened to household finances and overall job security throughout Australia. If household finances are percieved to be declining when inflation expectations are rising, the economists argue, consumers are in fact transmitting the message they believe real incomes are deteriorating.

In addition, the economists add, overall job market sentiment is a significant variable – how many workers would be willing to press their luck on hefty real wage increases when unemployment is rising, the economists ask.

As such, Westpac economists now believe current inflation expectations, when adjusted for consumer sentiment variables, may highlight a threat to real consumption as large as that they pose for a wage/price beakout.

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