Australia’s 3.8% inflation rate is concerning, but not enough to trigger a rate rise
- Written by John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of Canberra
After falling for five consecutive quarters to less than half of its 7.8% peak, inflation climbed slightly in the June quarter, from 3.6% to 3.8% for the year to June.
A rate of 3.8% is what the Reserve Bank had forecast. It is in line with market expectations, and well down on the 6% recorded this time last year.
It is likely not to cause much alarm at the Reserve Bank, whose board meets to consider the future of interest rates on Monday and Tuesday next week.
In Australia, as in much of the rest of the world, inflation in the price of goods has come down faster than inflation in the price of services.
Among the prices increasing the fastest are rents, up 7.3% over the year, reflecting the low vacancy rate.
The increase in average rents would have been even higher, 9.1%, had Commonwealth Rent Assistance not increased.
There have also been large rises in insurance premiums (up 14% in the past year, reflecting natural disasters) and tobacco prices (up 13.4%, reflecting increases in tobacco taxes).
There were falls in the prices of beef, lamb, furniture, household appliances, games and toys, childcare and domestic holiday travel over the past year, purchases that tend to get less attention.
To get a better idea of what would have been happening were it not for unusual and outsized moves, the bureau calculates what it calls a “trimmed mean” measure of underlying inflation.
This excludes the 15% of prices that climbed the most during each quarter and the 15% that climbed the least or fell.
Watched closely by the Reserve Bank, this measure of inflation actually fell slightly in the June quarter, from 4% to 3.9%.
The separately calculated and less-comprehensive monthly measure of annual inflation, which misled some commentators by jumping to 4.0% in May, fell back to 3.8% in June.
The monthly measure, which the Bureau of Statistics calls an “indicator” rather than an index, zigs and zags around the quarterly index and provides a poor guide to trends.
The bureau is redesigning it and will unveil the results late next year.
The outlook for inflation
From here on in, the September and December quarters’ higher crude oil and shipping costs are likely to put upward pressure on prices.
But the main short-term influence will be price-relief measures announced in the May budget.
Treasury estimates suggest the A$300-per-household energy rebate and the 10% increase in the maximum rate of Commonwealth Rent Assistance will bring down measured inflation by 0.5 percentage points.
This might be enough to return headline inflation to the Reserve Bank’s 2-3% target band for the first time since 2021.
What will it mean for my mortgage?
Having predicted 3.8%, the bank is unlikely to be spooked into increasing rates because inflation has edged up to where it expected it to be.
Importantly, the bank believes wages growth has “likely passed its peak”.
This suggests inflation in the price of services will subside over time.
For some prices, this will take some time. Many of the prices that are continuing to climb strongly are administered, the result of government decisions or automatic indexation to previous inflation.
Other prices appear to be back within the Reserve Bank’s target band.
Economy barely growing
The national accounts show the economy is barely growing.
If the most recent figure of 0.1% for the March quarter is revised down, Australia will find itself on the edge of a so-called “technical recession”.
The bank wants inflation back within its 2-3% target band. But it doesn’t want to needlessly damage the economy doing it. Its agreement with the government requires it to balance its inflation objective with the objective of “sustained and inclusive full employment” in its deliberations about interest rates.
It will be pleased to know most of the economists in The Conversation’s latest forecasting survey expect inflation to return to the band by mid-2025.
The bank’s own survey of economists shows the same thing, as does pricing on interest rate futures markets.
It is true Australia’s Reserve Bank has not raised interest rates as much as some central banks in some other countries. In part, this is because inflation didn’t climb as high in Australia as in many other countries.
