Australia’s Inflation Sees a Rise as Economists Keep a Close Eye

Australia‘s annual inflation has crept up to 3.8 per cent, which is an increase from 3.6 per cent at the start of this year. This change, reported by the Australian Bureau of Statistics (ABS), highlights how prices have risen by 1 per cent in the June quarter, following a similar 1 per cent rise in the March quarter.

For the first time since December 2022, we’re seeing a slight bump in the overall consumer price inflation. Economists had predicted this increase in prices, so it wasn’t a shock for many officials.

Importantly, the ‘trimmed mean’ measure of inflation, which is what the Reserve Bank (RBA) closely watches, actually went down a bit in the June quarter. It slipped from an annual rate of 4 per cent to 3.9 per cent. The RBA aims to bring this measure down to their preferred range of 2 to 3 per cent, and it has been gradually declining for the last six quarters.

According to BDO Economics partner Andes Magnusson, the latest Consumer Price Index (CPI) release confirms inflation is proving to be as stubborn as expected, but it aligns with the RBA’s forecasts. Magnusson described this as good news for the RBA as they work to control inflation while also ensuring workers don’t lose the benefits from a robust job market.

«Today’s release hasn’t changed our outlook,» Magnusson noted. He believes the RBA will likely cut interest rates in early 2025, emphasizing that there won’t be a cash rate hike next week, despite the ongoing financial struggles faced by many Australians.

The RBA Board is set to meet soon to discuss interest rates, with the current cash rate target resting at 4.35 per cent.

The upcoming inflation figures could heavily influence the government’s popularity and their political standing. Economists expect the headline consumer prices for the June quarter to hit 3.8%, which is an acceleration from 3.6%. The core inflation is predicted to stay steady at 4%.

If the inflation figures come in higher than expected, it could prompt the RBA to increase the cash rate to 4.6%, marking the 14th hike in this cycle. Conversely, if the figures meet or undershoot forecasts, there might be calls for earlier rate cuts to avoid a recession.

The RBA is looking for assurance that inflation is on track to return to its desired 2-3% range. Households and businesses are hoping that increasing rates won’t be necessary to keep inflation in check.

Since the RBA began raising rates in May 2022, monthly mortgage payments have surged by about $240 for every $100,000 borrowed. A further increase would raise this burden by an additional $15, affecting many households.

Investment bank UBS is among the few predicting an immediate rate hike to 4.6% next week, noting that inflation has surpassed the RBA’s target for 12 consecutive quarters.

The RBA Governor Michele Bullock highlighted in May that the board is committed to not allowing inflation to return to target more slowly than hoped, as that would jeopardize their credibility.

While many rich nations, like Canada and the European Union, are starting to cut rates, Australia remains unique in its considerations of another rate hike. The shadow treasurer, Angus Taylor, has criticized the government, stating that Australians are facing higher prices, interest rates, and taxes because of poor economic management.

Treasurer Jim Chalmers acknowledged that while inflation appears to be persistent, he remains optimistic it will start to ease. He pointed out that factors like rent and petrol prices, influenced by global oil markets, are key players in this inflation story.

Recent research suggests that much of the inflation this year stemmed from ‘administered’ prices, largely unaffected by interest rate hikes in the near term. This indicates that an RBA rate hike could stifle growth in sensitive sectors and lead to higher unemployment.