According to the Reserve Bank of Australia (RBA), inflation in Australia is declining, but still too high at 6%. Goods-price inflation has eased, but prices of many services are rising briskly; and rent inflation is also elevated. The central forecast is for CPI inflation to continue to decline to be around 3.25% by the end of 2024 and to be back within the 2–3% target range late 2025.
The Australian economy is experiencing a period of below-trend growth, which is expected to continue for a while. Household consumption growth is weak, as is dwelling investment. The central forecast is for GDP growth of around 1.75% over 2024 and a little above 2% over the following year.
Conditions in the labour market remain very tight, although they have eased a little. Job vacancies and advertisements are still at very high levels, although firms report labour shortages have lessened. With the economy and employment forecast to grow below-trend, the unemployment rate is expected to rise gradually from 3.5% to around 4.5% late next year. Wages-growth has picked up in response to the tight labour market and high inflation. At the aggregate level, wages-growth is still consistent with the inflation target, provided that productivity growth picks up.
Returning inflation to target within a reasonable time frame remains the RBA’s priority. High inflation damages the functioning of the economy – eroding the value of savings, hurting household budgets, making it harder for businesses to plan and invest, and worsening income inequality. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment. To date, medium-term inflation expectations have been consistent with the inflation target and it’s important this remains the case.
The recent data are consistent with inflation returning to the 2–3% target range over the forecast horizon and with output and employment continuing to grow. There are however, significant uncertainties. Services-price inflation has been surprisingly persistent overseas and the same could occur in Australia. There are also uncertainties regarding lags in the operation of monetary policy and how firms’ pricing decisions and wages will respond to the economy slowing, while the labour market remains tight. The outlook for household consumption is also an ongoing source of uncertainty. Many households are experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income. In aggregate, consumption growth has slowed substantially due to the combination of cost-of-living pressures and higher interest rates.
Some further tightening of monetary policy may still be required to ensure that inflation returns to target in a reasonable time-frame, but that will depend upon the data and the evolving assessment of risks. In making its decisions, the RBA will pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market and remain resolute in its determination to return inflation to target and will do what’s necessary to achieve that.