Inflation's steady pace quashing prospects of a rate hike
Wages pressure remains an unknown variable but most indicators, including stabilised inflation, suggest the cycle of interest rate rises has come to an end.
The latest inflation figures for January show that inflation has stabilised, further reinforcing expectations that the extended period of interest rate hikes has come to an end.
Australian Bureau of Statistics data released Wednesday (28 February) will come as some relief to borrowers, with the inflation rate coming in at 3.4 per cent for the 12 months to January 2024.
This was the same as the increase for the 12 months to December 2023, but down from the November 2023 figure of 4.3 per cent.
Renters, for whom their accommodation is generally consuming around 30 per cent of their income, could be excused for taking little solace from the over inflation reading.
Rent prices rose 7.4 per cent in the 12 months to January, reflecting a tight rental market and low vacancy rates across the country.
Housing rose 4.6 per cent, down from 5.2 per cent in December. New dwelling prices rose 4.8 per cent over the year with builders passing through higher costs for labour and materials.
Michelle Marquardt, ABS Head of Prices Statistics, annual inflation when excluding volatile items has been declining since the peak of 7.2 per cent in December 2022.
The cost of living crisis is still sapping the spending and investment power of consumers.
Annual electricity prices rose 0.8 per cent in the 12 months to January 2024. The introduction of the Energy Bill Relief Fund rebates for eligible households from July 2023 has mostly offset electricity price rises from annual price reviews in July due to increases in wholesale prices.
“Excluding the rebates, electricity prices would have increased 15.3 per cent in the 12 months to January 2024,” Ms Marquardt said.
“Annual inflation for food and non-alcoholic beverages increased to 4.4 per cent in January, up from 4.0 per cent in December.
“Annual inflation remains elevated for food, apart from fresh food categories.
“Meat and seafood and fruit and vegetables, for example, saw lower or negative annual inflation,” Ms Marquardt said.
The latest CPI figure defied economists’ expectations of a 3.6 per cent increase.
Real Estate Institute of Australia (REIA) President, Leanne Pilkington, said the 13 rate hikes by the RBA since May 2022 are slowly but surely stemming the inflation tide.
“With the latest unemployment figures showing a rise to 4.1 per cent in January, from 3.9 per cent in December and the first time in two years that the unemployment figure has been above 4 per cent, the lagged response to the successive interest rate hikes is showing up in the CPI.
“As the Secretary to the Treasury said to the Parliamentary Economics Legislation earlier this month ‘the drivers of inflation are normalising…we expect that services inflation has likely peaked and will moderate….as the economy cools’.
“The pointers are that the RBA should keep the lid on further rate rises at its meeting in three weeks’ time and that home buyers can anticipate a rate reduction later this year,” Ms Pilkington said.
Wages could pressure inflation
While struggling wage earners may find it incredulous as they struggle to keep their heads above water, Federal Government Treasury analysis that emerged this week concluded high wages growth was the “biggest” driver of inflation.
According to Treasury, the 0.9 per cent rise in the Wage Price Index in the December quarter means wages were 4.2 per cent higher through the year, the equal fastest annual growth since 2009.
It marks the first time since 2018 there’s been three consecutive quarters of real wages growth.
Monthly CPI figures can be more volatile than quarterly ones because the ABS surveys only part of the basket of goods and services.
The Reserve Bank wants to be sure inflation remains on course to return to within its target range of 2-3 per cent by next year and to about 2.5 per cent by 2026.
“Today’s (Wednesday) CPI release should be broadly reassuring to the RBA and, on balance, reduces the risk it might consider yet another rate increase in coming months,” wrote Betashares’ Chief Economist, David Bassanese.
The timing of any potential cuts remains unclear.
While the RBA has shied away from speculating on potential rate cuts, the big four bank economic teams all believe Australia will see at least one rate cut in the second half of 2024, with CBA predicting as many as three before the year’s end.
Australians have not been sitting idle during the 4.25 percentage point increase to the cash rate.
RateCity.com.au analysis of RBA data shows the average owner occupier on a variable rate has negotiated or refinanced their way out of almost three standard cash rate hikes – or 0.72 percentage points.
Interestingly, current big four bank customers have fared better than the average, with the analysis showing these owner occupier variable rate customers have, on average, managed to avoid 0.77 percentage points worth of rate rises.
