Australian Inflation Rate: Will It Drop Below 3% In 2024?

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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.

June 2024 quarter (Q2) results released in July this year revealed the Consumer Price Index (CPI) rose 1.0%, representing an annual increase of 3.8%.

The quarterly result was in line with forecasts, which was heralded as good news — but not enough to prompt a rate cut from the Reserve Bank of Australia, which held at 4.35% in August.

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 remains sticky with the CPI at 3.8% and households having to spend more on essentials.
Monthly inflation was trending upwards between March to May — but June’s quarterly figure was in line with forecasts — somewhat easing fears of rate hikes.
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, and low vacancy rates mean rental prices keep climbing.

Above: Inflation in what are known as ‘non-tradeables’ — things like housing, rent, insurance and electricity — remains elevated at 5%.

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 June 2024 were:

The ABS said electricity prices rose 6.0% in the 12 months to June, but Australians would have seen a 14.6% increase if it weren’t for government energy bill subsidies.

May’s monthly CPI indicator surprise — with inflation creeping up to 4.0% (above estimates of 3.8%) had reinforced a view that rate hikes could be warranted.

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.

After the May figure’s release, AMP’s chief economist Shane Oliver said:

The fact that underlying inflation (trimmed mean) fell slightly in Q2, from 4.0% in the March quarter to 3.9% in June, was positive news.

Still, a cash rate increase seems to have been narrowly avoided at the RBA’s August meeting. The Board remains concerned about inflation’s trajectory due to local demand, as well as global risks:

RBA Governor Michele Bullock said the Board considered a raise before deciding to hold.

Investment expert and former RBA staffer Christopher Joye said  the RBA had been “humiliatingly" forced to push-out its estimate of when inflation would hit the mid-point of the target range from mid-2026 to the end of 2026.

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 signalled at its July meeting, when it held rates, that it could  start easing sooner (i.e., September).

Despite the welcome news, 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, there’s talk in the US of the potential for an urgent rate cut by the Fed. Although few believe the turmoil will trigger an inter-meeting cut, there may be a case for more aggressive cutting in the remainder of 2024. 

The US CPI held steady in May and declined by 01% in June. That brought the annual rise to 3.0%.

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 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 3.1%.

While acknowledging the risk of persistent price pressures if productivity doesn’t pick up, the government believes inflation could moderate more quickly than expected:

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:

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.

Following the RBA’s August decision to hold rates, Governor Michele Bullock indicated that no rate cuts were likely within six months.

The central bank’s tightening bias was clear:

That prompted Westpac to put its forecast of rate cuts this year “under review.” Only Commbank is still forecasting a cut this year, of the Big 4 banks.

Just prior to the RBA decision, Westpac's chief economist Luci Ellis warned that rate cuts needed to start ahead of inflation reaching target to account for monetary policy lag:

In an August 2024 economic insight, Commbank predicted just one rate cut in November 2024 but said there was “a clear risk that monetary policy easing could be delayed into H1 25.”

Commbank expects major central banks to continue cutting rates in the second half of 2024 with global growth to pick up in 2025 — but risks are ever-present:

Predictions for the consumer price index headline rate in 2024 from the banks include:

Bank	2024 Q4	2025 Q2
Westpac	2.6% annual change 3.5% trimmed mean	2.3% annual change 3.0 trimmed mean
NAB	3.1% annual change 3.1 trimmed mean	2.9% annual change 2.8% trimmed mean
CommBank	3.1% annual change 3.3% trimmed mean
ING	3.7% annual change	2.9% annual change

What Factors Cause Inflation To Persist?

You can look at the Australian economy in one of two ways:

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.

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.

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.

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.

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.

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 7.3% annually according to the latest CPI numbers.

It would have been a 9.1% annual increase to June 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.

In June, the US annual CPI fell by 0.1% after no change in May. In the UK, inflation fell back to 2% for the first time in nearly three years in May, and held at 2% in June.

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).

In particular, a key risk is whether hawkish monetary policy delivered so far will be sufficient to slow inflation down to target levels.

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.

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 3.9%.

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.

What Is Inflation?

Inflation is a consistent, economically significant price rise across the economy.

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 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.

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.

Jody