Chinese Imports Could Raise Aussie Inflation Pressure

An expected increase in Chinese goods entering Australia sounds like a win for consumers, but it could actually raise prices, complicating efforts by the Reserve Bank of Australia (RBA) to manage inflation. While many expect Australia to benefit from discounted Chinese exports redirected from the US due to the ongoing trade war, one economist argues this shift will reduce competition and increase import costs instead.

Right now, Australia is navigating a fragile inflation recovery. Prices have just returned to the RBA’s target range for the first time in three years. The backdrop is the latest round of US tariffs on China, which could significantly reshape global supply chains. Chinese manufacturers likely won’t be able to send as many low-cost items to the US, meaning they’ll look to other markets like Australia to absorb the surplus.

However, the twist is that as the US increasingly sources its imports from countries like Vietnam, Japan, and Thailand, these alternative suppliers may no longer ship as much to Australia. That creates a vacuum — with less competition, prices for imported goods could rise. At a time when Australia’s core inflation has slowed to 2.9% after peaking at nearly 7% in 2022, any new upward pressure could prompt the RBA to hold back on interest rate cuts.

Markets currently expect multiple rate reductions this year based on slowing global growth and falling inflation. A May cash rate cut to 3.85% is still on the table. But analysts are growing cautious. While some believe China’s deflationary environment means prices won’t rise significantly, others warn global supply chain disruptions could bring renewed consumer price increases.

Australia’s weak currency could also magnify these pressures. The Australian dollar has dropped by five US cents since September, now trading around US64.43¢, potentially increasing the cost of imported goods. Analysts expect the RBA to proceed carefully, possibly holding off on immediate rate cuts until global economic trends become clearer.

Source: Australian Financial Review, Reserve Bank of Australia, University of Queensland.