Australian Economy

Australian inflation is under control – now it’s time to worry about the economic health of households | Greg Jericho

That sound you heard was a massive sigh of relief from mortgage holders across the country as the latest inflation figures pretty much put an end to interest rate rises. The latest quarterly CPI figures released by the Bureau of Statistics on Wednesday showed annual inflation has fallen from 5.4% in the September quarter to just 4.1% in the December quarter of 2023:

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That fall is the biggest drop – outside the 2020 lockdowns – for more than a decade. It means inflation is going down almost as fast as it went up.

The better news is from the (admittedly) more erratic monthly CPI figures also released on Wednesday. On this measure – which excludes a few items with prices that don’t generally change week to week or month to month, such as education costs – estimated inflation in the past year rose only 3.4%.

That is not only just a touch above the Reserve Bank’s target, it also puts us right next to the US:

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One criticism you may have heard from some sectors is that Australia’s inflation has been well above that of the US. Well, no more.

On the monthly measure, US inflation rose 3.3% compared with our 3.4% and, even better, our inflation has been falling for the past six months, while in the US it has hit a plateau.

But before we all get giddy, let’s not forget that it is easy to fall into the trap of only caring about the past year’s figures and forgetting what came before them. That prices only rose 4.1% (or even 3.4%) across 2023 does not remove the price increases that happened in 2022 and 2021.

If the RBA is right and wage growth in the year to December last year will come in at 4%, that will still mean that over the past three years, while wages have risen a total of 10%, prices will have gone up 16.1%. That means the average wage is buying about 6% fewer things than it could in 2020.

That will take a long time to recover.

And even while inflation overall is now about the level of wage growth, it is worth noting that in the past 12 months the prices of non-discretionary items – those things you can’t avoid buying or paying for (energy bills, food, insurance and rent, etc) – rose 4.8%.

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Because lower-income households spend a greater share of their income on these essentials, yet again, they have been hurt more than richer households who can afford to spend a larger share of their income on non-discretionary items such as holidays, eating out at restaurants or buying stuff at hardware or electrical stores.

Of the 12 biggest contributors to overall inflation in the last six months of 2023 (which, combined, made up 90% of all inflation), eight were non-discretionary items:

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This just reaffirms the decision by the Albanese government to reconfigure the stage-three tax cuts to give more to low-middle income earners who have been hit hardest by inflation.

Of course, rental price growth has been the big issue for many Australians and the past two years have been brutal:

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On the mainland, Canberra’s rental price growth has remained below CPI. Perhaps it’s no coincidence the ACT has rental price caps.

One key aspect of these numbers is that they don’t really take into account the November interest rate rise. It always takes a few months for the impact of a rate rise to flow through the economy.

These figures would suggest the RBA hit inflation as it was already going down, and going down fast.

The risk of course is that could be overkill and the rate rises cause unemployment to increase quickly.

One sign the rate rise in November was not needed was that the retail trade figures for December, also released this week, show a big fall in our spending.

This was in part due to – as I noted last month – our habits shifting to shopping at the Black Friday sales.

But even when you count the total spending in October, November and December in 2023 compared with the same periods in 2022, retail spending grew only 1.4%:

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That 1.4% growth is well below the 3% average growth of the pre-pandemic years.

That is not a sign of a strong economy filled with households flush with cash. It is not a sign of an economy where strong demand is driving up prices. Instead, it shows that households were already doing it tough and were already stopping their spending right at the moment the RBA decided we needed one more whack.

Inflation no longer seems to be a worry, but the economic health of households remains a concern. Let us hope the RBA does not believe we need any more hammering.

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