The inflation divergence

Delivered on By Justin Pyvis

Good morning! We trust everyone caught the federal budget last night, which other than all of the leaked infrastructure projects basically involved Treasurer Frydenberg announcing several short-term cost of living relief measures – all paid for with debt, of course.

Thankfully we’ll never have another crisis, so who needs budgetary discipline or productivity-boosting reform, anyway?

Here are a few key highlights if you missed it:

  • This year’s budget deficit will be $21.3 billion better than expected thanks largely to “higher near-term commodity prices”, which says more about forecasting than fiscal responsibility (the deficit will still be a whopping $79.8 billion).
  • Unemployment is forecast to decrease to a 48-year low of 3.75% by the September quarter but wages growth will remain slow at 3.25% next financial year, while inflation drops to 3.0%.
  • A one-off payment of $250 will be made to pensioners and welfare recipients.
  • A one-off increase to a tax offset will see those earning up to $126,000 a year pocket an extra $420 when they file their taxes.
  • The fuel excise tax will be cut by 22.1c a litre for six months at a cost of around $3 billion in foregone revenue.
  • Parents will be able to claim 20 weeks of parental leave, to be shared between them as they see fit (instead of 18 weeks for the primary carer and 2 for the other partner).
  • The government will acts as guarantor for 50,000 first home buyer loans each year, up from the current 10,000 (what could possibly go wrong?).
  • Finally and yes this is real: the Australian Signals Directorate will get $10 billion as part of “Project REDSPICE” – Resilience, Effects, Defence, Space, Intelligence, Cyber, and Enablers.

And here’s a cartoon depiction of the budget, courtesy of the SMH:

Scott Morrison and Josh Frydenberg, by John Shakespeare.
Scott Morrison and Josh Frydenberg, by John Shakespeare. Source

Reading the tea leaves

Daily % change







AU Bond



US Bond









Brent (bbl)



Gold (oz)



Iron ore (t)









Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries.

The US S&P500 gained 1.23% after Russia’s deputy defence minister Alexander Fomin said Moscow will “fundamentally cut back” operations near Kyiv to “increase mutual trust”, while Ukraine said it was willing to accept neutrality, as the two sides engaged in the first face-to-face peace talks in more than two weeks.

Also helping markets was US consumer confidence for March, which rebounded from a one-year low, and JOLTS job openings data, which showed vacancies still far outpaced new hires in February.

Locally, the ASX200 gained 0.70% with every sector rising except for materials (-0.2%) and energy (-0.6%), the latter of which was hit by further declines to the price of Brent crude oil on demand concerns with COVID-19 cases popping up over China, threatening further lockdowns.

The big winner was the tech sector which rose +3.3% thanks to the strong US lead the night before, with Afterpay’s owner Square finishing the session up 6.8%.

Food for thought

Fiscal stimulus, not adequately offset by the central bank, is one cause of rapid inflation.
Fiscal stimulus, not adequately offset by the central bank, is one cause of rapid inflation. Source

The US Federal Reserve Bank of San Francisco published a research article yesterday examining why “since the first half of 2021, US inflation has increasingly outpaced inflation in other developed countries”.

Their short answer is:

“…that fiscal support measures designed to counteract the severity of the pandemic’s economic effect may have contributed to this divergence by raising inflation about 3 percentage points by the end of 2021.”

The US spent big in response to the pandemic – as of 27 September 2021 the IMF estimated that the US government had spent an additional 25.5% of GDP, the most in the world. That was followed by New Zealand and the UK (both 19.3%), and Singapore and Australia (both 18.4%), while the advanced economy average was 11.7%.

All of those countries have subsequently started to raise interest rates, except Australia. One reason for that divergence is because Australia’s inflation data are horribly lagged, with the most recent data point being the December quarter 2021. Most other advanced economies produce their consumer price index figures monthly.

But even the December quarter figure was hot: while official inflation was ‘only’ running at 3.5%, the quarterly change was 1.3%, which corresponds to a much more worrisome annualised growth rate of 5.3%.

Another warning sign that rising inflation is already locked-in this year is nominal GDP, which has been growing in the double-digits for three consecutive quarters. That’s “around twice as fast as it expands in ‘normal’ times with moderate inflation”.

It all adds up to soaring inflation this year, an outcome enabled by the Reserve Bank of Australia (RBA), which has more than enough tools in its arsenal to prevent the largest post-war increase in government spending – topped up even further by yesterday’s budget – from becoming inflationary.

Chewing the fat

Bits and bytes

📈 Australian consumer inflation expectations climbed another 0.4 percentage points to 6.4% last week, the highest since June 2012.

🤑 Cashed-up Aussie consumers splurged in February, with retail sales rising 9.1% from a year ago and 1.8% from January to their second highest level on record (previous high: November 2021).

📉 Earlier this week the 5-year US Treasury yield rose above the 30-year yield for the first time since 2006, a yield-curve inversion that has historically signalled an economic slowdown or recession.

☢️ No one has done more to convince consumers to move away from oil than Russia: “For the first time in more than a decade, a narrow majority in Japan now supports restarting idled nuclear reactors.”

🌊 “The NSW government has approved fewer than 400 disaster relief grants for flood-ravaged northern rivers businesses, despite receiving almost 8,000 requests for help since applications opened almost a month ago.”

❌ President Joe Biden’s budget-saving plan to tax unrealised capital gains will be opposed by Democratic Senator Joe Manchin, “likely dooming it just hours after it was sent to Congress”.

🥊 Rock would have to put on a bit of weight, no? YouTube celeb Jake Paul offered Will Smith and Chris Rock $US30 million “to step in the ring and settle their differences”.

🏝️ The PM of the Solomon Islands, Manasseh Sogavare, told Parliament: “We find it very insulting Mr Speaker, to be branded as unfit to manage our sovereign affairs”, after the Australian and New Zealand governments expressed their concerns about the deal.

💳 A badge of honour in the US: “Arkansas state treasurer candidate Mark Lowery has filed for personal bankruptcy twice… and is still in the process of paying about $68,000 worth of debts.”

🐊 Only in Florida: “Officials seized a staggering 75 guns from rampaging partiers in a spring break beach town this past weekend alone — calling it enough firepower to ‘arm a small army’.”

👎 Concerning Ukraine, the UK PM Boris Johnson said that “a ceasefire alone would not be cause for UK sanctions to be removed on Russia”.