Inflation spikes ahead of Black Friday spending spree | Close of Business

Key Concepts

• Black Friday and Christmas Sales: Australian shoppers are projected to spend nearly $7 billion, with a significant portion on credit.
• Debt Accumulation: Rising credit card balances accruing interest and a surge in buy now, pay later (BNPL) applications indicate increasing consumer debt.
• BNPL Blurring Lines: BNPL services are increasingly resembling traditional credit cards, potentially entangling more Australians in debt spirals.
• Inflation and Interest Rates: Inflation has risen to 3.8% (year to October), dashing hopes of a New Year's rate cut and raising concerns about potential RBA rate hikes.
• Cost of Living Squeeze: Rising prices for essentials like food, electricity, and rent are impacting both consumers and businesses.
• Housing Market Regulations: APRA is introducing new rules to limit high-risk mortgages, capping loans at six times annual income to 20% of new home loans.
• Food Delivery Driver Agreement: Uber Eats, Door Dash, and the Transport Workers Union have reached an agreement for guaranteed minimum pay rates for drivers.
• ASX Performance: The ASX 200 experienced a rebound after a 4-week losing streak, driven by US markets and tech/materials sectors, but overall November was a poor trading month.
• AI and Tech Bubble: Concerns about an AI bubble persist, particularly regarding infrastructure, but the long-term potential of AI software and usage remains significant.
• Bitcoin Volatility: Bitcoin experienced a 30% crash due to factors like potential US tariff hikes and ETF outflows, but a hint of US interest rate cuts provided a brief rebound.
• Fed Independence: Concerns are raised about potential political pressure on the US Federal Reserve's independence, particularly regarding appointments.

Consumer Spending and Debt

Australian shoppers are anticipated to spend almost $7 billion during the upcoming Black Friday and pre-Christmas sales. A significant portion of this spending is expected to be on credit. Financial counselors are expressing concern that this spending spree could lead to a substantial financial burden for many individuals.

• Increased Interest-Accruing Balances: In the past couple of months, there has been an increase in credit card balances that are accruing interest, a trend not seen for some time.
• Record High Debt: In September, Australians held $18.4 billion in debt that was accruing interest on their cards, marking a 4-year high.
• Surge in BNPL Applications: Applications for buy now, pay later (BNPL) credit services have surged by 43%.
• Rising BNPL Issues: The National Debt Helpline has reported a 7% increase in buy now, pay later debt issues compared to previous years, with still six weeks of reporting remaining.
• BNPL Resemblance to Credit Cards: Money.com's Shan Callerie notes that BNPL providers are increasingly offering products that are more akin to credit cards, leading to a blending of the two sectors.
• Debt Spiral Concern: Financial counselor Deb Shroot warns that individuals attempt to rectify their debt situation by taking on more debt, leading to a cycle where more debt is needed to service existing debt.
• February Danger Zone: Economists predict that this debt spiral typically becomes apparent in February when consumers face the bills from their Christmas spending and additional expenses. Households are entering this period with higher debt levels than usual.

Inflation and Economic Outlook

The Reserve Bank of Australia (RBA) is closely monitoring consumer spending due to its potential impact on inflation.

• Rising Prices: Alongside increased seasonal spending, prices are also escalating.
• Dashed Rate Cut Hopes: Hopes for an interest rate cut in the new year have diminished as inflation climbed to 3.8% in the year to October.
• Potential Rate Hike: Some economists are predicting that the next move from the RBA could be an increase in interest rates.
• Cost of Living Impact: The rising cost of living is making everyday activities like dining out a luxury for many.
• Business Cost Pressures: Restaurants are also facing challenges with rising costs, including higher wages, produce, and electricity bills, which are impacting profit margins.
• October Inflation Figures: Annual inflation accelerated to 3.8% in October, up from 3.6% in September.
  • Electricity prices jumped by 37.1% as government rebates were phased out.
  • Rents increased by 4.2%.
  • Building costs also rose.
  • Food prices, particularly for beef, lamb, and seafood, contributed significantly to inflation.
• Underlying Inflation: The RBA's preferred measure of underlying inflation is now above its target band.
• Volatile Inflation Indicator: While the new monthly inflation indicator is considered volatile, it highlights ongoing cost-of-living pressures.
• Comparison to Previous Years: Inflation is still elevated compared to two years ago when it was well above 5%, but it is better than that period.
• Impact on Mortgage Holders: This inflation data is particularly concerning for mortgage holders, as it diminishes the likelihood of a rate cut.
• Government Rebates: The Treasurer has not ruled out the possibility of reintroducing electricity rebates, with a decision to be made in the context of the mid-year budget update.
• December Rate Cut Off the Table: A December rate cut is no longer considered a possibility.
• RBA's Next Move: The RBA will closely observe the labor market and inflation trends in the coming months before making a decision in February.
• AM Forecast: AM economists believe there is still a chance of a rate cut next year, but this depends on inflation figures slowing down. They anticipate inflation data to start decreasing in the second half of next year.
• Risk of Higher Inflation: The current figures suggest a risk that inflation may remain too high in Australia, necessitating a longer wait for it to stabilize.
• Business Adjustments: Businesses are facing tough decisions, with some resorting to price increases on high-cost food items to absorb rising costs.

Interest Rate Outlook and Global Factors

The current inflation spike presents a balancing act for the RBA, and there are differing views on the future trajectory of interest rates.

• Odds of Rate Hike: The likelihood of a rate hike next year has increased.
• Shane Oliver's Perspective: Shane Oliver, Chief Economist at AM, believes there is still a possibility of interest rate reductions.
  • Volatility of New Index: The new monthly inflation index is new and expected to be volatile.
  • Administered vs. Market Prices: A significant portion of the inflation increase stems from administered prices (influenced by government) rather than free market forces.
  • Economic Data Fluctuations: Economic data tends to fluctuate, with periods of softness followed by rebounds.
  • Monetary Policy Tightness: Monetary policy remains relatively tight, and the RBA itself acknowledges it might be slightly too tight, which is not an environment conducive to rate hikes.
  • Conditions for Rate Cut: A rate cut next year would require a consistent run of lower inflation figures below target and higher unemployment.
  • Rate Hikes in 2027: Oliver believes discussions about rate hikes are more likely for 2027.
• Conditions for Rate Hikes: To see higher rates, there would need to be an ongoing trend of higher inflation (focusing on quarterly numbers), low unemployment, and faster-than-expected economic pick-up. However, Oliver considers this scenario unlikely given the early stage of economic recovery.
• Global Inflation Fight: The difficulty in bringing down inflation in the "last mile" is a global phenomenon.
  • Post-COVID Inflationary Environment: The world may have entered a more inflation-prone era compared to pre-COVID times.
  • Reduced International Competition: Protectionist measures, such as US tariffs, have reduced international competition.
  • Tighter Labor Markets: Labor markets may be tighter than in the past.
  • Government-Related Inflation: Government actions are contributing to inflation, particularly in Australia.
  • Stalled Inflation in Other Countries: Other nations have also experienced inflation stalling around 3% or slightly higher.
• RBA's Dilemma: The RBA faces a dilemma with rising inflation and increasing unemployment.
• Recommended RBA Action: Shane Oliver suggests the RBA should "sit tight" given the conflicting indicators.
• US Federal Reserve Independence: Concerns are raised about the independence of the US Federal Reserve due to Donald Trump's efforts to appoint loyalists to its board.
  • Steven Mnuchin Appointment: Trump has appointed Steven Mnuchin, a loyalist, to the board.
  • Challenge to Lisa Cook: Trump attempted to remove Governor Lisa Cook, a move that has been challenged in court.
  • Jerome Powell's Term: Trump will have the opportunity to replace Jerome Powell as Chairperson when his term expires in May.
  • Potential Nominee: It is conceivable that Trump will nominate someone very close to him, raising concerns about Fed independence, especially with sticky inflation.
  • Market Reaction: In the short term, this might not be a major issue if the US labor market weakens and the Fed cuts rates. However, in the long term, it could lead to increased bond yields and pressure on the Fed to hike rates again.
  • Recommended US Nominees: Christopher Waller or Kevin Walsh are suggested as more market-friendly nominees than someone very close to Trump.
• US vs. Australian Money Markets: US money markets are anticipating approximately four rate cuts over the next year and a half, while Australian money markets are factoring in rate hikes. The economic outlooks between the two countries are not dramatically different, suggesting potential mispricing in both markets.

Housing Market Regulations

Australia's banking regulator is implementing new rules to curb risky mortgage lending.

• New APRA Rules: The Australian Prudential Regulation Authority (APRA) has announced new regulations to limit the number of high-risk mortgages for homeowners and investors.
• High Debt-to-Income Ratio Cap: From early next year, only 20% of new home loans will be permitted for borrowers whose debt is six or more times their annual income.
• Current Lending Share: Currently, loans with a debt-to-income ratio of six or more represent about 6% of all loans, including approximately 10% of investor loans and nearly 4% of owner-occupier debt.
• Purpose of the Rules: These changes are designed as a safeguard against higher-risk lending practices, aiming to protect against potential systemic risks.
• Exemptions: The limit does not apply to bridging loans for owner-occupiers or loans for the purchase or construction of new dwellings.
• Impact on Property Types: The regulations are expected to encourage development in new properties and new builds, often located in outer suburban areas, as well as smaller developments.
• Impact on Investors: Investors are likely to be most affected, as they may already have existing loans and could exceed debt-to-income ratio caps when adding an investment property.
• Historical Precedent: APRA previously tightened lending standards over a decade ago following the financial crisis. However, a subsequent round of restrictions on interest-only mortgages was reversed, deemed too stringent at the time.
• Comparison to 2017 Changes: The current changes are considered less binding than those introduced in 2017, which capped interest-only lending. At that time, the share of interest-only loans was significantly above the cap, whereas currently, the share of high debt-to-income loans is well below the new cap.
• Investor Lending Growth: APRA's latest restrictions follow data indicating that investor borrowing has been increasing at a faster rate than lending to owner-occupiers.
• RBA Warning: The RBA's October financial stability review cautioned that investor loans may be at a greater risk of default during a severe economic downturn.
• Market Momentum: The new rules may slightly dampen momentum at the margins by constraining some investor activity. However, home price growth is still expected to continue next year.

Food Delivery Driver Agreement

Food delivery drivers have secured a significant agreement regarding pay and working conditions.

• Historic Agreement: Uber Eats, Door Dash, and the Transport Workers Union have reached an historic agreement.
• Guaranteed Minimum Pay Rates: Drivers will now receive guaranteed minimum pay rates.
• Current Driver Concerns: Drivers like Eric Island report earning below minimum wage after expenses like petrol, and often face long waits for food orders.
• New Pay Structure: Drivers will be paid the minimum wage plus 25% for every hour worked.
• Eight-Year Struggle: This agreement is the culmination of an eight-year campaign by drivers.
• Lack of Protections: Previously, drivers lacked benefits like superannuation and had to work even when unwell or in adverse weather conditions.
• Company Support: Uber Eats and Door Dash support the proposal, stating it provides assurances to workers while supporting the gig economy.
• Potential Cost Increases: The companies will not necessarily cover the extra costs, which could lead to increased delivery fees for customers or contributions from restaurants and platforms.
• Fair Work Commission Approval: The deal still requires approval from the Fair Work Commission.

Market Analysis

The Australian share market experienced a rebound, but broader economic concerns remain.

• ASX Rebound: Australian shares saw a respite, snapping a 4-week losing streak. The ASX 200 and All Ords finished the week up around 2.5%.
• November Performance: Despite the weekly gain, November was the worst trading month since April, with a 3% fall.
• US Market Influence: The rebound is largely attributed to a US-led rally, with the US market experiencing a 4-day winning streak.
• Sector Drivers: The tech and materials sectors were key drivers of the Australian market's rise this week.
• Lingering Unease: Despite the positive week, there is still unease in the market, with uncertainties surrounding 2026 and future growth.
• Santa Claus Rally: The possibility of a Santa Claus rally, which has occurred annually for the past five years (excluding 2020), is being considered.
• AI and Tech Bubble Concerns: Fears of a tech and AI bubble have contributed to a November sell-off, but these concerns appear to have subsided.
• AI Infrastructure vs. Usage: The AI story has largely focused on infrastructure development. The next phase will involve software and actual usage, with current software usage estimated at only 5%.
• Infrastructure Bubble: The bubble is more likely to be in the infrastructure side, with questions arising about whether the peak has been reached.
• Long-Term AI Potential: The overall AI story, considering its full potential, still has a significant runway.
• Upcoming GDP Figures: The Gross Domestic Product (GDP) figures are a key data point to watch, as they will indicate Australia's economic performance and influence discussions about interest rates in 2026.
• RBA Hold Expected: The RBA is expected to hold interest rates steady on December 9th.
• Setup for Next Year: This week's data is seen as a setup for next year, with discussions likely to focus on potential rate hikes in 2026 if inflation remains high and unemployment is robust.

Bitcoin Market Volatility

The cryptocurrency market, particularly Bitcoin, has experienced significant fluctuations.

• Bitcoin Price Crash: Bitcoin's price crashed by 30% in November.
• Contributing Factors:
  • Tariff Hikes: Donald Trump's threatened tariff hikes against Chinese goods earlier in the year created anxiety.
  • ETF Outflows: The launch of Bitcoin Exchange Traded Funds (ETFs) and subsequent selling pressure contributed to the decline.
• CryptoCon Event: Despite the market downturn, Bitcoin believers were present at CryptoCon, an event in Sydney.
• Bitcoin's Appeal: Bitcoin is seen as an exciting asset class, with governments and retailers showing increasing interest.
• All-Time High and Sentiment Shift: Bitcoin reached an all-time high in October, but sentiment was shaken by the announcement of additional tariffs on Chinese goods.
• Consolidation Phase: The current market situation is described as a period of consolidation.
• "Crypto Whale" Concerns: A decline in "crypto whales" (investors holding over 1,000 Bitcoin) selling their holdings is a concern.
• Borrowed Money and Margin Calls: Some investors who bought Bitcoin with borrowed money may face margin calls if the asset's value falls below a lender's comfort level, potentially leading to forced selling.
• ETF Outflows: Billions of dollars have flowed out of Bitcoin ETFs as margin calls increase, contributing to the price drop.
• Weekend Rebound: Bitcoin's price climbed approximately 4% over the weekend.
• US Interest Rate Hint: A hint from the US central bank about potential interest rate cuts in December enticed investors back into the market.
• Bitcoin's Future: The key question is whether Bitcoin can reach new heights.
• Stigma and Noise: There is significant stigma and noise surrounding cryptocurrencies, but a growing number of individuals and companies are involved.
• Lack of Intrinsic Value: Bitcoin does not generate income (interest or dividends) and has no intrinsic value, leading to the question of why hold it if its price is not expected to increase.
• Risk and Volatility: The cryptocurrency market remains highly volatile, with risks ever-present.