Yetsenga: it’s an excess demand problem

The key driver of Australia’s inflation difficulties is excess demand – and that means a rising official cash rate should help address the problem, according to ANZ Chief Economist Richard Yetsenga.

In June, Yetsenga shared his economic insights with 300 ANZ clients and bankers at the 2022 Debt Conference in Sydney. He said the lion's share of the inflation pressures in Australia was centred on policy over-easing and excess demand.

“The volume of global industrial production is well above pre-pandemic levels,” Yetsenga said. “The volume of consumer spending in Australia is 9 per cent above pre-pandemic levels.”

Despite concerns around global conditions, Yetsenga said the vast majority of contemporary inflation data is from before the conflict in Europe even began, making it difficult to link the two.

“We primarily have an excess demand problem,” he said. “That's good news, by the way. Because what it means is when central banks tighten, they are actually facing into the primary driver."

Challenges

Policymakers face significant challenges both globally and domestically, Yetsenga said.

Overlapping supply chain issues hitting oil, food and electricity prices are some of the main current drivers, he said, and the task now is for central banks to minimise the spill over into broader inflationary pressures.

“[Global] central banks have a policy challenge,” Yetsenga said.

Price pressures more broadly will continue to run hot in 2022, he said, and global supply chain issues are yet to meaningfully and sustainably recover from recent disruption.

“The next 12 months are going to be challenging, there's no doubt about that,” Yetsenga said. “We need to adjust policy back to levels which make more sense for the economic environment.

“There are a few rapids ahead, but I think if we look to the horizon, there's much we can be more positive about.”