Australia’s falling inflation means interest rates have peaked? Don’t bank on it

11 months ago 18

For outgoing Reserve Bank governor Philip Lowe, navigating the Australian economy along a “narrow path” between the perils of too-high inflation and a too-sudden slowdown has been the mantra for more than a year.

The June quarter’s lower than expected consumer price increases indicate the path may be widening slightly. The RBA, which left its interest rate unchanged in April and July, is strongly favoured to pause again at its August board meeting next Tuesday.

June retail trade figures on Friday will probably confirm shoppers are pulling back, providing the last major datapoint for the central bank to scrutinise. ANZ’s tracking suggests spending during the first 22 days of July dived more than a 10th from a year earlier “despite ongoing inflation and strong population growth”.

However, it would be unwise to rule out further rate rises – either by Lowe before he takes his own off-ramp as governor in mid-September, or by his pathfinding successor, Michele Bullock.

Sure, inflation has been on the skids since December’s peak at 8.4%. June’s was down three percentage points to 5.4%, and an extension of that decline would get us to within the RBA’s preferred 2%-3% range by year’s end.

Some examples, such as the US’s, foster disinflation hopes. In the past 12 months, the US inflation rate has dropped from 9.2% to 3% without the economy stalling.

Australia’s inflation mix, though, rings a few cautionary notes. Yes, goods prices continued to advance at a slower pace, rising 5.8% for the June quarter from a year ago, down from 7.6% in the March quarter.

But that retreat was largely expected as global commodity markets continue to reset after the disruptions unleashed by Russia’s wanton onslaught against Ukraine.

Further energy price falls aren’t a given. Big suppliers such as Opec have restricted output to stabilise prices and will probably keep doing so.

Moscow’s unpredictability – such as backing out of a grain export deal and missile attacks on Ukraine’s ports – may also reverse the retreat in global food prices so many had been banking on.

The extreme summer weather in the northern hemisphere won’t help farm output either. The RBA offered its own gloomy tidings for the south:

“The increased likelihood of an El Niño event in 2023-24 and an associated downgrade for agricultural production could put upward pressure on some food prices over the coming year,” it said in its June board minutes.

The RBA has for some time fixed a beady eye on the services sector as its main concern about inflation incubation. Those June quarter figures won’t loosen that fixation either.

Inflation for services quickened – not slowed – to 6.3% from 6.1% in the March quarter, the fastest annual pace since the GST began in 2001.

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“Services inflation, particularly market services inflation, has been correlated with labour cost growth,” Steven Wu, an CBA economist said. “Offshore services inflation has remained sticky despite central banks lifting rates higher than here in Australia, though we note real wages outcomes elsewhere have been stronger.”

As the Australian Bureau of Statistics noted, services inflation was powered by increased costs for utilities and rents.

Neither of those components is particularly promising. This month brought increases in many electricity tariffs of as much as a third. Rents in the June quarter alone advanced 2.5%, the most since 1988.

A range of other price adjustments will show up in the July CPI numbers, including insurance and childcare.

ABS CPI release shows childcare prices up 9.5% over the FY (gross prices as no policy change in 22/23). This is prior to the introduction of the new child care subsidy so expect further strong gross price increases in 23/24.

— Ben Phillips (@BenPhillips_ANU) July 26, 2023

Annoyingly, the ABS won’t release June quarter wage price index numbers until 15 August, about three weeks behind consumer prices.

Two days later, we get July jobs figures, which will tell us whether companies are still busily recruiting extra staff at June’s heady clip. Wages too might finally be perking up.

Throw in the recovery in property prices and what that might mean for extra spending the RBA had not factored in.

That narrow path, in other words, may still be a long and winding.

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