Commodity prices shift from headwind to tailwind

The recent leap in the prices of the main commodity exports of Australia and New Zealand will boost domestic demand in both economies, but it is unlikely to lead to much faster wage growth and much higher underlying inflation. That’s because businesses are more likely to take advantage of the adequate supply of labour and use the commodity price windfall to raise profits and boost investment rather than wages. So while the outlook for domestic activity in both Australia and New Zealand has improved, the era of unusually low underlying inflation isn’t over. It’s possible that the RBA and RBNZ will put up with low inflation, but we wouldn’t be surprised if they cut interest rates further next year, from 1.50% to 1.00% and 1.75% to 1.50% respectively.