Last updated: December 16th, 2024
Despite the quarterly inflation figure for September 2024 being the lowest in three years and entering the targeted 2-3% target range, the Reserve Bank of Australia (RBA) remains concerned about persistent underlying inflation.
The effect of 13 interest rate rises from the RBA across 2022-23 seem to be finally reducing price pressures.
The Consumer Price Index (CPI) rose just 0.2% in the three months to September, representing an annual increase of 2.8%.
With its view that core inflation is still “too high”, the central bank held interest rates at 4.35% in September, November and December.
Plus, cost of living pressures remain high.
But what do leading economists say about the odds of inflation rising again or declining further in 2024?
| Key Takeaways: |
|---|
| Inflation has fallen with the headline CPI at 2.8%, but households are still having to spend more on essentials. |
| Monthly inflation was trending upwards between March to May — but August saw a sharp decline to 2.7%, and a further drop to 2.1% in September and October. |
| Rents and services like insurance and healthcare are still hitting hip pockets hard, reflecting domestic price pressures. |
| Australia’s inflation and rate-cutting cycles are expected to lag major economies like the US, so interest rate relief isn’t imminent. |
Above: Australia’s pace of disinflation has stalled. It’s the slowest disinflation cycle in the modern monetary policy era (post-1990).
Australian Inflation Rate Remains Stubbornly High.
While Aussies are paying less for the basics, they’re still paying too much. Spending on non-discretionary items is still outpacing our ability to splurge.
- Finding a place to live is still incredibly tough.
Rent increases have eased from the extremes seen in recent years, but low vacancy rates mean rental prices keep climbing.
According to Louis Christopher, managing director of SQM Research, the national rental market is not expected to materially soften out of the rental crisis for some years.
Above: Inflation in what are known as ‘non-tradeables’ — things like housing, rent, insurance and electricity — remains elevated at 5%.
Did you Know?
September quarter CPI figures show rental prices rose 6.7% annually — down from 7.3% in June and 7.8% in March, which was the strongest rise in 15 years.
However, the RBA expects easing rental price growth seen in the three months to September to feed through to lower rental inflation in the CPI.
Important!
Between now and the next CPI print on 29th January 2025, November sales and Christmas celebrations will encourage splurging.
Other significant price increases in the 12 months to September 2024 were:
- Fruit and vegetables (8.6%).
- Insurance and financial services (6.2%).
- Education fees (6.4%)
- Alcohol and tobacco (6.7%)
- Medical and health services (4.8%).
The price rises across goods and services were offset by significant falls in the cost of electricity (-17.3%) and fuel (-6.7%), according to ABS head of prices statistics, Michelle Marquardt.
The less comprehensive monthly CPI data released for October revealed the rate of price increases had slowed dramatically to 2.1%.
The impact of subsidies and pockets of price easing hasn’t been enough to sway the RBA to move on rates any time soon.
Important!
October’s trimmed mean — the RBA’s preferred measure of inflation — was out of target range at 3.5%.
However, the RBA’s decision to hold rates in December did come with a positive change in language. The Board said it’s “gaining some confidence” that inflation was in decline due to a softening of demand.
RBA Governor Michele Bullock said:
A cut in February is now possible.
But the prevailing view among economists is that a start to cuts will be pushed back to around May 2025.
Important!
Some economists, like Judo Bank’s Warren Hogan, previously called for rate increases in 2024, but now believes the policy rate should stay on hold for another year.
He told SkyNews the window for the RBA to “get ahead” of inflation with a hike had closed due to the politics of the situation:
The next federal election is expected to happen sometime in May 2025.
Hogan warned that the Australian economy has proven resilient, so softer data doesn’t necessarily signal a downward trend — despite markets pricing in a high probability of rate cuts in early 2025:
Is The Australian Economy Doing Worse Than The US?
Australia’s inflation and rate cycle is lagging behind those of other major economies, particularly the US.
In its latest forecast released in November, the RBA acknowledged Australia was sitting at the upper end of the inflation range amid peer economies.
Above: Inflation is easing across advanced economies, but Australia’s CPI one of the most elevated.
But our labour market is also stronger than many peers.
The US Federal Reserve lifted its cash rate higher in a shorter time span — and after some shaky unemployment data emerged, started easing sooner.
The Fed announced a 50 basis point cut to US rates at its September 2024 meeting, putting its benchmark rate at 4.75%-5.0%.
An additional 0.25% cut came in November, and another 0.25% cut is expected in December.
Important!
US rate cuts had been in doubt after consistent inflationary pressure in 2024, with increases to CPI between January and April.
Financial markets were spooked after data released on August 2nd revealed the US unemployment rate had increased above expectations to 4.3% in July.
While markets largely rebounded within days, calls for cuts by the Fed to stem economic concerns eventuated.
But the Fed Chair Jerome Powell said during a speech in November that there was no rush:
The US CPI increased by 0.2% in July, August, September and October. That brought the annual rise to 2.6%.
It remains to be seen how well the US’ soft landing sticks once President-elect Donald Trump takes office in January 2025, given is stated plans to impose tariffs.
AFR columnist Christopher Joye argues the Fed irresponsibly slashed rates to assist the Biden and Harris campaigns, concerned about a Trump administration that would undermine its powers.
He said financial markets could be in for a rude awakening if the Fed is forced to reverse its easing cycle, which “could involve a cataclysmic correction.”
Uncertainty created by Trump’s reign will also impact Australia’s economy according to economist Michael Blythe, co-founder at PinPoint Macro Analytics.
But all signs point to slowing inflation and a series of rate cuts:
What Is The Australian Government's Forecast?
In its 2024-25 Budget, Treasury forecast that inflation would return to the target range (2.75%) by mid-2025, which is better than the RBA’s forecast of 3.0% (trimmed mean).
The government was right that inflation has moderated with help from fiscal policies:
The actual CPI figure for the June 2024 quarter matched the RBA’s forecast of 3.8% (Treasury predicted 3.5%).
The RBA’s most recent outlook sees:
- Headline inflation reaching 2.6% by the end of this year (compared to 3.0% forecast in August).
- Underlying (trimmed mean) inflation taking longer to moderate, ending the year at 3.4% (previous forecast 3.5%).
Above: The RBA remains ready to hoist interest rates if significant price rises continue.
Despite below-trend GDP growth predicted in the coming year, both Commbank and Westpac believe the RBA won’t need to tighten rates further to quell inflation.
Important!
Following the RBA’s August decision to hold rates, Governor Michele Bullock indicated that no rate cuts were likely within six months.
That prompted Westpac to put its forecast of rate cuts this year “under review” — with a revised view that cuts would arrive in February 2025.
They revised again in November to predict a cut in May.
Following the December hold, Westpac chief economist Luci Ellis said the bank couldn’t rule out an earlier start to cuts, but believed the RBA would remain cautious while core inflation was above target:
NAB and ANZ both see cuts being delayed to May 2025 after originally forecasting February.
Commbank changed its forecast in late October following the release of the latest CPI data — giving up on a cut in 2024 (in December) and anticipating the first cut in February 2025.
The bank maintained its position after the RBA left rates on hold in December.
But its head of Australian economics, Gareth Aird, said the call was “in doubt” following ABS labour force data released on December 12 that showed solid employment growth.
Predictions for the consumer price index headline rate in 2024 from the banks include:
| Bank | 2024 Q4 | 2025 Q2 |
|---|---|---|
| Westpac | 2.5% annual change 3.3% trimmed mean | 2.0% annual change 2.8 trimmed mean |
| NAB | 3.0% annual change 3.5 trimmed mean | 2.4% annual change 2.9% trimmed mean |
| CommBank | 3.1% annual change 3.3% trimmed mean | |
| ING | 2.5% annual change | 1.9% annual change |
What Factors Cause Inflation To Persist?
You can look at the Australian economy in one of two ways:
- Close-up. Consider interest rate rises, inflation data, food prices, unemployment rate, etc.
- Big picture. Study geopolitical issues, long-term trends and historical patterns.
Both are important. But in times of stress, humans overestimate the impact of the former and overlook the indirect (yet powerful) impacts of the latter.
The following micro and macro issues could have an impact in 2024:
1. Geopolitical Turmoil.
Further slowing of growth in the Chinese economy and ongoing conflicts in Russia/Ukraine and the Middle East are of concern.
Expert Tip.
Market shocks could also arise from upheaval caused by changing governments, as the US, UK and India have all headed to the polls this year.
Keiran Davies from Coolabah Capital Investments said that how Donald Trump enacts policy when he takes office in January could factor in to the RBA’s decision:
The Israel-Hamas war has escalated Israel’s conflict with Iran, including triggering the first-ever direct strike on Israel by Iran in April, a subsequent Israeli counterstrike.
More recently, the growing regional war saw Israel target Hezbollah leaders in Lebanon. A tentative ceasefire with Lebanon is already showing signs of fraying, with violence from both sides.
In addition to supply disruptions, oil-producing countries — such as OPEC members and Russia — can have an outsized influence on the economies of rivals by manipulating the price of crude oil exports through reduced production.
Important!
More expensive oil contributes to already strained cost of living in major economies like the US.
2. Rising Employment And Wages.
The Australian job market was on fire in 2023, with the lowest unemployment in history and a 7.1% rise in labour costs.
(The fastest rise in any other advanced economy).
Economic forecasts point to an expected softening of the labour market into 2025.
Still, employment has been resilient.
In June, the Fair Work Commission announced a 3.75% increase to minimum and award wages this year — which the Albanese Government argued for to ease the cost of living pressure on low-paid workers.
Expert Tip.
Combined with rising real wages, it gives people more money to spend, increasing demand for goods and services and the impetus for corporations to lift prices.
3. Government Spending.
Fiscal policies impact how consumers and businesses make financial decisions.
This is why major government infrastructure projects, investments, subsidies and stimulus come under close scrutiny.
The Albanese Government’s budget delivered in May achieves a surplus for the 2023-24 financial year, but returns to deficit in 2024-25 — with a cumulative deficit over the next four years of $88 billion.
Economist Michael Blythe said that while the measures were cleverly designed, the money that would have been spent on power bills could now be used elsewhere.
Expert Tip.
Blythe said anyone worried about fiscal policy should also pay attention to so-called ‘Off budget’ spending that isn’t reported in the underlying Budget balance, which amounts to “a whopping $80.5 billion over the period to 2027-28.”
4. High Migration Levels.
Albanese’s government is facing heat after Australia’s migration boom dwarfed treasury forecasts, with a net gain of over 500,000 people in 2023, according to ABS stats.
In its September statement, the RBA noted that:
Australia’s rental market is still tight, resulting in rental price inflation rising 6.7% annually, according to the latest CPI numbers.
It would have been an 8.5% annual increase to September 2024 without the availability of subsidies through the Commonwealth Rent Assistance (CRA) program.
Above: Some of the most significant price rises occurred in the rental market.
What Is The History Of Inflation Rates In Australia?
Australia saw several spikes in the inflation rate in the 70s, 80s and 90s.
The RBA adopted the 2-3% inflation target in the early 1990s, with cash rate changes as the primary tool to stimulate or dampen economic activity and keep inflation stable.
Pent-up demand from that period was cited as a major cause of skyrocketing inflation as pandemic restrictions eased.
Australia’s inflation rate hit a 22-year peak in December 2022, reaching 7.8%.
Above: Consumer price index averages can obscure price movements in different parts of the economy. Services and rent inflation is still high, while goods (including food) inflation is falling.
How Does Australia’s CPI Compare Globally?
Australia’s inflation rate is one of the worst among advanced economies.
While many countries — the US and UK included — have experienced rising inflation of late, there’s evidence that inflation is easing more quickly elsewhere.
Did You Know?
In June, the US annual CPI fell by 0.1% after no change in May. However, it has seen a slight increase of 0.2% for four months in a row — July through to October — for a 2.6% annual increase.
In the UK, inflation fell back to 2% for the first time in nearly three years in May, and held at 2% in June.
Then the UK’s CPI saw a small bump, recording an inflation rate of 2.2% in both July and August. In October it fell to 1.7%, but November saw a higher-than-expected jump to 2.3% due to a rise in electricity and gas prices.
Above: The Economist coined a measure of “inflation entrenchment", a statistic used to demonstrate the stickiness of inflation. Australia is leading the pack, likely due to some of the most generous pandemic stimulus measures.
In its economic outlook published in December, the OECD said that growth was stabilising and inflation had moderated back to central bank targets in many economies.
However, services inflation was persistent and was set to remain so — at a median rate of 4.0% across OECD economies.
It sees the key risks being geopolitics disrupting energy and supply chains — driving inflation higher — and a more fragmented trading environment that also raises prices.
Did You Know?
The OECD predicts global growth at a rate of 3.3% in 2025, with global activity proving relatively resilient despite subdued consumer confidence.
While the OECD said central banks now had more scope to cut policy rates, it warned:
Important!
The OECD warns that fiscal policy needs to address rising debt service costs and spending pressures to improve debt sustainability.
Above: Projected inflation rates for 2024 (Australia, Eurozone, UK, US, Canada & Japan).
Frequently Asked Questions About Australian Inflation Rate.
If you find macro- and microeconomic concepts difficult to wrap your head around, you're not alone. Get up to speed with my definitions below.
Headline Consumer Price Index vs Underlying CPI: What's The Difference?
Headline and underlying CPI are two different ways to interpret the price change data collected by the ABS.
- Headline inflation describes the overall quarterly and year-over-year change in goods and services prices, based on the entire basket of items the ABS uses to calculate price changes. This can be distorted by Black Swan events (e.g., when flooding hurt veggie producers, causing a spike in the price of the humble lettuce).
- Underlying inflation is based on analytical measures of the CPI, intended to omit or smooth over quarterly price volatility. Underlying inflation calculations provided by the ABS include the Trimmed mean and Weighted median.
Another way CPI is analysed is the ‘Seasonally adjusted’ figure that accounts for regular seasonal price movements, such as an increase in the price of education in March each year.
The measure spreads out the impact of ‘seasonal’ pricing over the year.
Inflation is currently slightly higher based on the Trimmed mean, at 3.5%.
Above: Consumer Price Index vs Trimmed Mean.
How Is The Consumer Price Index (CPI) Calculated?
Staff from the ABS investigate current prices on a fixed ‘basket’ of things that an Australian household would typically spend their money on, like groceries, housing, transport, healthcare, entertainment, and utilities (around 1 million prices are collected every quarter).
They calculate the price change from the previous quarter in aggregate to determine an overall inflation rate.
- The ABS also publishes price changes across various groupings of goods and services — as some areas contribute more significantly to headline inflation.
- For example, in the 12 months to the June 2024 quarter, insurance prices rose 14%.
What Is Inflation?
Inflation is a consistent, economically significant price rise across the economy.
Practical Example.
If the average price of insurance and financial services rose by $1,000 across the country, that would be considered inflation. If the price of these services rose in a single city, it would not be considered inflation.
Most often, inflation is caused by an imbalance in the supply and demand of money.
Why Is Inflation Dangerous?
Inflation can become a self-sustaining cycle. History is full of examples where out-of-control inflation brought relatively strong economies to their knees.
- Higher prices encourage workers to demand higher pay.
- Higher pay translates into higher overheads for businesses.
- Businesses charge higher prices to maintain profitability.
Higher prices make goods and services less affordable to everyday people, who demand higher wages again.
What Caused The Latest Spike In Australia's Inflation?
During lockdowns, the Australian government rolled out one of the most generous stimulus packages in the world.
Can Inflation Lead To A Recession?
Yes.
Rises in inflation, combined with interest rate rises, can force people to spend less while encouraging businesses to lay off employees. Unemployed people are less likely to buy goods and services, accelerating the downturn.
Did You Know?
The definition of 'recession is two consecutive quarters of negative GDP growth.
Final Words On Rising Inflation Rate In Australia.
While there’s always a risk that prices will continue to surge, most experts agree Australia’s inflation rate will trend downward in 2025.
It’s expected that fewer supply constraints and reduced consumer spending — due to Aussies feeling the impact of cost of living — will both reduce underlying price pressures.
But nobody knows for sure whether the monetary policy tightening we’ve already seen — with the cash rate now at 4.35% — will slow down spending enough and how the chips will fall in relation to other macroeconomic factors like global supply, GDP growth and unemployment.
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