Last updated: June 27th, 2024
Despite slowing due to 13 interest rate rises from the Reserve Bank of Australia (RBA) across 2022-23 in pursuit of its 2-3% goal, Australia’s inflation remains sticky.
March 2024 quarter (Q1) results released in April this year revealed the Consumer Price Index (CPI) rose 1.0%, representing an annual increase of 3.6%.
An upside surprise on the monthly indicator data on inflation for May (released 26 June) has sparked uncertainty about inflation moderating. The Monthly CPI spiked to 4.0% — higher than the expected 3.8%, and up from 3.6% in April.
Plus, cost of living pressures remain high.
In the face of a volatile global economic outlook and persistent high inflation, the RBA switched to a hawkish stance at its meeting in June.
The RBA weighed up lifting rates, but ultimately held them at 4.35%.
But what do leading economists say about the odds of inflation rising again or declining further in 2024?
| Key Takeaways: |
|---|
| Inflation remains sticky with the CPI at 3.6% — higher than expected — and households having to spend more on essentials. |
| Monthly inflation is trending upwards, from 3.5% in March to 3.6% in April and 4.0% in May, stoking fears of rate hikes in August. |
| Rents and services like education and insurance 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 isn’t alone in experiencing annual inflation growth above the pre-Covid average.
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.
Above: Inflation in what are known as ‘non-tradeables’ — things like housing, rent, insurance and electricity — remains elevated at 5%.
Finding a place to live is still incredibly tough, and low vacancy rates mean rental prices keep climbing.
Did you Know?
March quarter CPI figures show rental prices rose 7.8% annually — the strongest rise in 15 years.
A more detailed ABS analysis finds capital city rental inflation outpaced regional areas in the past year, but the overall increase in rents paid since 2019 was higher for people living in regional areas.
Other significant price increases in the 12 months to March 2024 were:
- Insurance and financial services (8.2%).
- Education fees (5.2%)
- Alcohol and tobacco (6.3%)
- Medical and health services (4.1%).
- Food and non-alcoholic beverages (3.8%).
May’s monthly CPI indicator surprise — with inflation creeping up to 4.0% — reinforced the impact of high prices for rents, electricity, transport, food and fuel.
However, the ABS’ Michelle Marquardt said that when items with volatile price changes were removed, underlying inflation was down 0.1% from April.
A Reuters survey of economists in June found that most predicted rate cuts to be delayed to Q4 2024 — around November — due to Australia’s stubborn and unique inflation challenges.
With Q1 inflation hotter than expected, forecasts of rate cuts by the Reserve Bank of Australia (RBA) have been revised by many economists out to 2025.
Important!
Some economists, like Judo Bank’s Warren Hogan, have said we may see multiple rate increases in 2024 to get inflation down.
A cash rate increase at the RBA’s August meeting has been given further credence after the monthly CPI indicator for May raised alarms about inflation’s trajectory.
After the May figure’s release, AMP’s chief economist Shane Oliver said:
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.
The US Federal Reserve lifted its cash rate higher in a shorter time span — and was expected to start easing sooner (i.e., September).
Important!
US rate cuts are also in doubt after consistent inflationary pressure in 2024. Having confirmed three cuts as recently as March, the US Federal Reserve is now expecting one cut with “data-dependent” timing.
Initial US inflation results from January and February 2024 were higher than expected, with a 0.3% and 0.4% rise, respectively.
The US CPI rose again in March by 0.4% and April by 0.3% — but held steady in May. That brought the annual rise to 3.3% — heralding a more restrictive policy.
PCE rose 0.3% in April 2024 and was sitting at 2.7% (up from 2.5 in February)—showing not much progress has been made.
Equity markets globally performed well in the first few months of 2024, but a recent report from Commbank suggests markets have been too optimistic about easing inflation and imminent rate cuts.
The bank thinks pressures will persist for longer locally:
What Is The Australian Government's Forecast?
In its recent Mid-Year Economic and Fiscal Outlook (MYEFO) released in December 2023, the Australian Government revised its expectations for inflation levels in Q2 2024:
Important!
It revised the forecast down to 3.5% for the June quarter when it released its full-year budget in May, which is better than the RBA’s revised forecast of 3.8%.
Treasury also forecast that inflation would return to the target range (2.75%) by mid-2025.
The actual CPI figure for the December 2023 quarter came in below the RBA’s forecast that CPI would decline to 4.5%.
Since then its updates have seen multiple forecast changes:
- In February, inflation was expected to drop to 3.2% by year-end (down from the 3.5% forecast in November ’23).
- In its May outlook, inflation was forecast to reach 3.8% by December, and fall into the target territory (3%) sometime between June-December 2025.
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!
Westpac’s Chief Economist Lucy Ellis said the Labor Government’s slated changes to stage 3 tax cuts - which will give a larger number of lower-income earners a tax break - would have a marginal macroeconomic impact.
The potential stimulatory effects of extra cash are offset by the financial squeeze most Australian households are under and falling real incomes.
Ellis said:
In a June 2024 economic insight, Commbank was predicting just one rate cut in November 2024 but said the upcoming Q2 ’24 CPI result to be released in July would be “incredibly important”.
The RBA seemed to renew its tightening bias at its June monetary policy meeting, saying, “It will be some time yet before inflation is sustainably in the target range.” Data that emerges in July could force its hand when it next meets in August.
Predictions for the consumer price index headline rate in 2024 from the banks include:
| Bank | 2024 Q2 | 2024 Q4 |
|---|---|---|
| Westpac | 3.8% annual change 4.0% trimmed mean | 2.9% annual change 3.5 trimmed mean |
| NAB | 3.5% annual change 3.7 trimmed mean | 3.1% annual change 3.1% trimmed mean |
| CommBank | 3.7 trimmed mean | 3.0% annual change |
| ING | 3.7% annual change | 3.5% 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 all head to the polls this year.
It’s also escalated Israel’s conflict with Iran, including triggering the first-ever direct strike on Israel by Iran in April, a subsequent Israeli counterstrike — and fears of a wider regional war breaking out.
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, which could — for instance — negatively affect Biden’s re-election bid.
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 in 2024.
Still, employment has been resilient.
The Albanese government has also said it will argue for an increase to a minimum and award wages this year 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 — which 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.
Australia’s rental market is still tight, resulting in rental price inflation rising 7.8% annually according to the latest CPI numbers.
It would have been a 9.5% annual increase 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 inflation is still high, while food inflation is falling. Fruit and vegetable prices have recorded the biggest falls.
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.
In May, there was no change to the US annual CPI and the UK saw inflation fall back to 2% for the first time in nearly three years.
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 May, the OECD said that while growth remains modest, inflation was falling faster than initially projected.
However, services inflation was persistent and was set to remain so.
It's driven by labour costs, energy prices and the “sizeable weight of housing rental prices” in some countries (particularly the US).
Did You Know?
The OECD predicted global growth at a rate of 3.1% in 2024, with most advanced economies being held back by a tightening bias needed to rein in inflation — but said global activity was proving relatively resilient.
In particular, a key risk is whether hawkish monetary policy delivered so far will be sufficient to slow inflation down to target levels.
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 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 4.0%.
Above: Consumer Price Index vs Trimmed Mean. CHANGE
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 March 2024 quarter, insurance prices rose 16.4%, the highest annual rise since 2001.
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 2024.
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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