Upside inflation risk lingers, economists warn
Inflation has fallen from its peak in 2022 but tighter labour markets and demand for housing remain key risks, economists say.
The latest inflation figures from the ABS have confirmed that the pace of consumer price inflation is slowing with the headline figure easing to 7 per cent, down from 7.8 per cent in the last quarter.
The trimmed mean was lower than expected at 1.2 per cent or 6.6 per cent over the year.
AMP economist Dian Mousina said while a drop in inflation is now occurring across the advanced world, there are still upside risks.
“Sticky services inflation is keeping the overall rate of inflation elevated and well above central bank inflation targets,” said Ms Mousina.
“While supply chains issues have been resolved and commodity prices are below 2022 levels, consumer goods inflation has not fallen as far as expected. In our view, it is just a matter of time until lower goods inflation feeds through into services prices which is what usually tends to happen throughout history.”
Inflation is now being driven by services inflation, predominately because of tight labour markets, she said.
“Counties like the US and Australia also have high housing prices from elevated rents which is adding to services inflation,” said Ms Mousina.
Services inflation rose by 1.7 per cent over the quarter in the latest ABS figures. This was lower than the last quarter but annual growth increased to 6.1 per cent, its highest level since 2001.
CreditorWatch chief economist Anneke Thompson said higher energy costs, a lack of staff driving up wages and continued demand for travel, education and rental properties are largely behind the increase in services inflation.
“Many service providers have been forced to pass on the input costs of energy and wages on to their customers, particularly in the restaurant and hospitality sector,” said Ms Thompson.
“High supply costs continue to be a cause for concern for food and beverage businesses, and we expect these businesses to be the largest contributor to business insolvencies in the year ahead.”
High rental growth is another significant upside risk for Australian inflation.
“Immigration has been higher than expected which is increasing demand for housing,” said Ms Mousina.
“Wages growth could surprise higher, especially if award and minimum wage agreements are lifted by the rate of inflation and as public sector wage caps are currently being increased across the state governments.”
CPA Australia senior manager of business and investment Gavan Ord said businesses should factor further volatitily into their planning.
“Our members are telling us that many businesses are still struggling to respond to this challenging environment,” he said.
“We are facing an unpredictable environment and businesses should not assume rate rises or inflationary pressures are over.”
Impact on RBA decision
The inflation figures provided little insight into how the RBA will respond in next week’s interest rate decision.
“On the one hand, the March figures reinforce that inflation has peaked, as quarterly core inflation dipped for the second consecutive time. It’s also worth remembering that monetary policy changes hit households at a lag. Even if the RBA decides to hold in the cash rate steady, mortgage rates will continue to rise and do the work of stemming household spending,” said Eliza Owen, Head of Research, CoreLogic Australia.
“On the other hand, labour market figures remained tight over the month, consumer sentiment surged, and household spending might be supported by large savings buffers, even as mortgage holders see their rates lift.”
Ms Thompson said the annual inflation rate will still be a concern for the RBA, with an increase in the cash rate next week now likely.
“While price increases of goods continues to moderate, and indeed have come down in some categories on a weighted average capital city measure services inflation continues to rise,” said Ms Thompson.
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