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Inflation has fallen, but one or two more interest-rate rises are still likely


Australian inflation has fallen from a 30-year high of 7.8% in the December quarter of 2022 to 7.0% in the March quarter of 2023. But the Reserve Bank of Australia is still likely to raise interest rates before the end of the year to bring inflation back to its target range.

Contributing to the lower Consumer Price Index growth in the first three months of 2023 were lower costs for furniture, appliances and clothing.

Other prices rose, but less than before. For example, the price of new homes. This is likely due to building materials becoming more readily available and softer demand.

Prices that change little include gasoline, which remains about the same as a year ago, following the Russian invasion of Ukraine in February 2022.

There are also some prices that have risen sharply.

Gas prices – also affected by the war in Ukraine – are up 26% from the March quarter a year ago. Electricity prices are also higher, 16% higher than a year ago.

There were also big increases in the price of tuition fees, up 9.6% from a year ago, and medical and hospital services, up 6.7%.

Read more: Inflation remains the ‘defining challenge’ as economic activity slows

The annual increase on average rents was 4.9% – the highest since 2010, due to the low rental vacancy rate.

Nevertheless, the increase in rents remained smaller than the general increase in the Consumer Price Index.

To get a better idea of ​​what would happen without some of the unusual and outsized moves, the Australian Bureau of Statistics calculates what it calls a “trimmed mean” measure of underlying inflation.

This excludes the 15% of prices that rose the most in the quarter and the 15% of prices that rose or fell the least. This gives a better picture of the underlying inflation trend.

This measure, closely monitored by the Reserve Bank, is now 6.6%.

Where is inflation going?

Both headline and trimmed mean measures are moving in the right direction, pointing to the success of 10 consecutive rate hikes over the past year in slowing the economy.

Inflation is likely to decline further.

The supply side issues of the COVID pandemic have largely been resolved. For example, shipping costs are back at pre-COVID levels.

The big question now is how quickly inflation will decrease, given that it is still well above 0.5% target of the central bank from 2-3%.

What does this mean for interest rates?

If said treasurer Jim Chalmers“inflation has peaked” but “will remain higher even longer than we would like”.

The spare bank prediction in February it was that inflation would not fall to the target of 2-3% before 2025. one or two more interest rises.

March’s quarterly figures are unlikely to change this assessment.

To speed up the process, more rate hikes are needed. But the bank balances its inflation target with the risk that higher interest rates will push the economy into recession.

Read more: The Lowe Road – the RBA enters a ‘narrow path’

Reserve Bank Governor Philip Lowe shared the board’s view on this a few weeks ago. Speaking to the National Press Club, he was asked why Australia did not follow other central banks in continuing to raise interest rates. He replied:

There is an argument for that, but it would mean job losses – more job losses – and our assessment at the moment is that if we can bring inflation back to 3% by mid-2025 and maintain many of the job gains that have been realized over the past years that is a better result than a year earlier bring inflation back to 3% and lose more jobs.

Today’s inflation data suggests the central bank won’t need more than one or two more hikes to keep inflation on its “narrow path” back to the target band.

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