Inflation at 20-year highs to crunch growth, hit jobs, Jim Chalmers warns

Jim Chalmers to warn worst inflation in two decades, combined with stalling global growth and rising interest rates will slash $30bn from economy in next three years.

Jim Chalmers will use a ministerial statement on Thursday to release forecasts predicting price growth will exceed the Reserve Bank’s peak of 7 per cent by the end of the year. Picture: Gary Ramage

Jim Chalmers will warn the worst inflation figures in two decades, combined with stalling global growth and climbing interest rates, will slash $30bn from the economy over the next three years in a parliamentary update that warns Australians to brace for “confronting’’ times.

With the latest inflation figures showing the Consumer Price Index jumped 1 percentage point to 6.1 per cent in the year to June, the Treasurer warned rising inflation and interest rates would hit jobs, growth and real wages.

Dr Chalmers will use a ministerial statement on Thursday to release forecasts predicting price growth will exceed the Reserve Bank’s peak of 7 per cent by the end of the year.

In a key ministerial statement aimed at resetting the nation’s economic narrative, Dr Chalmers will warn that the Australian economy is growing, but added: “so are the challenges.”

The inflation data, released on Wednesday, reaffirmed expectations that the Reserve Bank would hike rates by half a percentage point to 1.85 per cent at next Tuesday’s board meeting, and to 2.6 per cent by the end of the year.

Dr Chalmers reassured Australians the government would take political responsibility for steering the nation through a “precarious and perilous” period. In extracts of his statement obtained by The Australian, Dr Chalmers warns some of the challenges facing the nation are “homegrown, others come from around the world. Our new government has begun its work in this time of serious uncertainty and substantial challenges,” he said.

“The growing pressures on the economy and the country don’t make our election commitments less important – they make them far more crucial.”

Treasury now expects annual growth in the past and the next two financial years will be 0.5 percentage points lower than predicted before the election. Real GDP is anticipated to grow 3.75 per cent in 2021-22, versus a previously estimated 4.25 per cent.

The economy will expand 3 per cent in 2022-23, rather than 3.5 per cent, before decelerating further to 2 per cent in 2023-24 – down from the 2.5 per cent predicted before this year’s surge in inflation triggered a series of rapid rate rises.

“Higher interest rates, combined with the global slowdown I’ve described, will impact on ­Australia’s economic growth,” Dr Chalmers says in his speech.

“Forecasts are never perfect, but these better reflect the economic circumstances our new government is now dealing with.

“Inflation will unwind again, but not in an instant.” Speaking on Wednesday, Dr Chalmers warned rising inflation and interest rates would hit jobs, growth and paypackets.

With ­inflation already above 6 per cent, and wages rising by only 2.4 per cent in the year to March, the Treasurer flagged workers would inevitably suffer a steep drop in real pay this year.

 

“The idea that we would be forecasting wages growth that keeps up with that (rate of inflation), I think would not be credible in the near term – but my expectation is that there will be real wages growth, in this term of the parliament,” he said.

Dr Chalmers said he did not want to give Australians’ “false hope” that the October budget would include further income support, as he again played down ­extending the temporary 22c ­petrol excise discount beyond September 30.

“My message to Australians doing it particularly tough is that we will do what we responsibly can to ease the pressure that they’re under and we will do that within the pretty serious fiscal constraints that we’ve inherited,” he said.

Data from the Australian ­Bureau of Statistics released on Wednesday showed climbing food, fuel and homebuilding costs continued to turn the screws on household budgets.

Excluding a temporary spike following the introduction of the goods and services tax at the turn of the century, when inflation also hit 6.1 per cent, it was the fastest­ ­increase in consumer prices since 1990.

Over the three months, inflation eased to 1.8 per cent, from 2.1 per cent in the previous quarter. International factors and supply-side constraints – such as shortages of workers and materials, most notably in the building sector – ­explained the bulk of the quarterly consumer price index result, alongside disastrous flooding on the east coast.

In keeping with the higher food and fuel prices, the cost of essential goods and services jumped 7.6 per cent through the year to June, lifting almost twice as quickly as discretionary – or “optional” – items.

Dr Chalmers said the climbing cost of living – including the jump in interest rates – was making it ­increasingly difficult for lower ­income households to get by.

“At some point, the most vulnerable people are making decisions between vegetables or rent. And that’s when it really bites,” he said.

But Westpac chief executive Peter King said his bank was yet to see a lift in the number of customers having trouble meeting their obligations.

“It’s not until the back end of this calendar year that we’ll really understand the dynamics, and that will just depend on where the cash rate goes to,” Mr King said.

CBA head of Australian economics Gareth Aird said “there are no two ways about it – inflation is red hot in Australia right now, as it is in many parts of the world, and the RBA will respond by raising the cash rate again at the August board meeting next week”.

The ABS figures showed food prices climbed another 2 per cent in the June quarter to be 5.9 per cent over the year, as the east coast floods sent fruit and vegetable costs spiking 5.8 per cent over the three months.

Petrol prices climbed 4.2 per cent in the quarter as the Ukraine war triggered a further surge in global oil prices, lifting the annual increase to a record 32 per cent.

Housing costs also jumped again, by 2.5 per cent over the three months, to be 9 per cent up on a year earlier. That included a 5.6 per cent quarterly lift in building prices, reflecting supply shortages and the end of HomeBuilder grants – alongside a more sedate 0.7 per cent lift in rents.

Clothing prices lifted 3.5 per cent in the June quarter, which the ABS put down to new season stock and higher freight costs.

The Reserve Bank’s preferred measure of underlying inflation, the trimmed mean consumer price index, lifted even more strongly, to 4.9 per cent over the 12-month period, from 3.7 per cent.

Citi chief economist Josh Williamson said the headline inflation figure came in slightly softer than the consensus forecast, while the underlying consumer price numbers matched expectations.

“This suggests that while inflation pressures are increasing in Australia, they are not as strong as in some other developed countries,” Mr Williamson said.

“Importantly, it means that the RBA should not need to lift the ­official cash rate as quickly or as high as some other central banks, particularly the US Fed.”

Moody’s Analytics economist Harry Murphy Cruise said inflation would likely push higher through this year, before peaking at about 7 per cent in December.

“This will lump further pressure on the RBA, which already finds itself in an unnerving position,” Mr Cruise said.

Additional reporting: Joyce Moullakis

Originally published as Inflation at 20-year highs to crunch growth, hit jobs, Jim Chalmers warns