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From Washington to London to Sydney, the world’s central banks are facing a problem being experienced by anyone looking for a cheap burrito in California or mince at a supermarket in Toowoomba.
Less than a year ago, it appeared central banks were about to declare success in the war on inflation that they themselves contributed to during the depths of the pandemic by keeping rates too low for too long and creating trillions of new dollars.
RBA governor Michele Bullock, Fed chairman Jerome Powell and European Central Bank chief Christine Lagarde.Credit: Monique Westermann
Interest rates were falling everywhere. Even the Reserve Bank got in on the act in February this year. At the same time, jobs growth appeared strong with unemployment remaining low.
Even the election of Donald Trump, particularly his “liberation day” tariff assault, was shrugged off.
But the unexpected spike in Australia’s inflation rate revealed this week, price and unemployment pressures in suburban America on top of a warning by the head of the US Federal Reserve that markets should not expect further interest rate cuts, all suggest the inflation war is heating up again.
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Financial markets a fortnight ago put the chance of an interest rate cut at next week’s Reserve Bank monetary policy committee meeting at better than 60 per cent. A cut by Christmas was all but guaranteed.
Those expectations collapsed after the Bureau of Statistics revealed a 1.3 per cent spike in headline inflation during the September quarter and a one percentage point jump in underlying inflation to 3 per cent.
Early analysis pointed to the end of electricity subsidies as the culprit (annual power inflation in Perth was minus 31.9 per cent in the March quarter, but 140.5 per cent by the September quarter).
But the figures quickly revealed a broad range of price pressures, from dentists to council rates to coffee. Takeaway meal prices jumped 1.5 per cent in three months.
It also confirmed that the price pressures that have been evident overseas, and which have caused problems for other central banks, are now lapping at Australia’s shores.
That brings us to burritos in Alameda, California.
Chipotle Mexican Grill is not some two-bit quesadilla flipper. It has a near-7 per cent share of the American restaurant industry. Of its 3830 US stores, two are in the San Francisco bayside suburb of Alameda, which amounts to a lot of burritos, tacos and guacamole.
Its share price dived 15 per cent on Thursday morning after it revealed a combination of factors, led by the soaring price of beef and a financial squeeze on lower-income Americans, meant sales were likely to be muted in coming months.
The company’s announcement came just ahead of the US Federal Reserve’s decision to cut its key lending interest rate by a quarter percentage point. But, just like Chipotle, the Fed is worried about inflation and the state of the economy.
The huge surge in valuations of tech companies such as Nvidia (which on Thursday hit a record $7.6 trillion or almost three times Australian GDP) has been predicated on deep cuts in interest rates. Those tech companies need cheap money to help cover the cost of their huge AI data centre plans.
But Fed chair Jay Powell made clear investors shouldn’t lock in more rate cuts with inflation still running at 3 per cent. The Fed’s inflation target is 2 per cent.
“A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it. Policy is not on a preset course,” he said.
That was confirmed by votes on the Fed. One person, Trump appointee Stephen Miran, wanted a half percentage point cut, while another member, Kansas City member Jeffrey Schmid, argued the bank should not cut at all.
“Policy is not on a preset course,” Jerome Powell has warned financial markets.Credit: AP
Adding to the Federal Reserve’s problem is the US government shutdown, which means key data such as inflation and economic growth is not being produced.
As Powell noted, “if you’re driving in the fog, you slow down”.
The same issues that hurt Chipotle and are concerning Powell were made clear in the results on Thursday from one of Australia’s supermarket giants, Coles.
It reported an easing in supermarket price inflation over the past quarter, but it is still running at 1.2 per cent. Cheaper burrito staples such as avocados, tomatoes and capsicum were offset by a lift in that other key ingredient, beef.
Coles also revealed that the shelf price of red meat would be even higher, but for the company taking a profit hit.
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These, and other issues, will play out in the Reserve Bank’s meeting next week. It will also take into account other economic currents sweeping the globe.
Just across the Tasman, inflation has climbed in New Zealand from 2.2 per cent to 3 per cent over the past year. Unemployment has been above 5 per cent all year.
And the economy has effectively been in recession for more than two years. The economy today is smaller than it was in 2023.
New Zealand’s central bank has cut its key interest rate by two full percentage points since July last year (with expectations of more relief next month), but even that sort of aggressive easing of monetary policy has yet to support the economy.
The Federal Reserve was not the only central bank to cut rates this week. The Bank of Canada reduced its key lending rate to 2.25 per cent on the same day as its southern counterpart.
Inflation there is around 2.4 per cent (although underlying measures are higher), but the Canadian economy is barely growing thanks to Trump’s tariffs.
European Central Bank chief Christine Lagarde, expected to hold interest rates steady at 2 per cent on Thursday night (AEDT), is also seeing signs of inflation picking up across the eurozone, where economic growth continues to be sub-1.5 per cent and unemployment is at 6.3 per cent.
Ongoing price pressures, softness in the jobs market, poor productivity growth, Trump’s tariff battles, moribund economic growth (outside of AI data centres) – no amount of guacamole will make this palatable for central banks.
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