Inflation ‘will get worse this year’ warns Treasurer Jim Chalmers

Shocking new forecasts show Australia’s inflation is expected to soar toward eight per cent and will take two years to slow to normal levels.

Shocking new forecasts show Australia’s inflation is expected to soar toward eight per cent and will take two years to slow to normal levels.

In a speech to parliament on Thursday outlining the economic situation, Treasurer Jim Chalmers warned wages would not be able to keep up with the rising cost of living, leaving more people struggling to pay for basic goods and services like fuel, food and rent.

Mr Chalmers said new forecasts prepared by Treasury officials show inflation is expected to peak at 7.75 per cent in the December quarter this year.

In the pre-election forecast released three months ago inflation was only expected to peak at 4.75 per cent.

Mr Chalmers said the current expectation was inflation would get worse this year, and be back to moderate in 2023 and nominal the year after.

Treasurer Jim Chalmers has warned inflation will peak at 7.75 per cent. Picture: Martin Ollman/Getty Images

“Treasury expects headline inflation at 5.5 per cent by the middle of next year, 3.5 per cent by the end of 2023, and by the end of 2024,” he said.

“That is back inside the RBA’s target range.”

Mr Chalmers said the “harsh truth” of Australia’s current economic troubles was many Australians would not feel the benefits of higher wages as inflation “eats up” increases “and then some”.

“Real wages growth relies on moderating inflation and getting wages moving again,” he said.

“Based on current forecasts, real wages are expected to start growing again in 2023-24.”

Mr Chalmers said even though more Australians were in jobs than ever before, fewer were felling “confident about the choppy waters our economy is in”.

“Because they see the impact that high inflation is having on their living standards – in an environment where workers aren’t getting wage rises sufficient to match price rises,” he said.

But Mr Chalmers said a “key difference” to the current situation for workers now than under the previous government, was that Labor had a plan to boost wages, not “deliberately undermine them”.

Prime Minister Anthony Albanese’s government is grappling with much worse than expected economic forecasts for Australia. Picture: Martin Ollman/Getty Images

Mr Chalmers said interest rate rises were also having an impact on household budgets.

“There’s no point pretending these rate rises don’t hurt – they do and they will,” he said.

“Every extra dollar Australians have to find to service the mortgage is a dollar that can’t help meet the high costs of other essentials.”

Mr Chalmers said some of the conditions determining the inflation problem were “outside of Australia’s control and largely unavoidable”.

“As much as we can provide support, we can’t control the war in Ukraine, or China’s Covid policies,” he said.

“Floods and new Covid variants bring the supply chain disruptions and worker absences we are experiencing.”

Mr Chalmers said China’s strict Covid containment measures were having a “substantial impact” on the nation’s output and has made existing supply chain disruptions “more severe”.

“China is our biggest trading partner by a long way – what happens with China’s domestic economy has a direct link to our national activity, income, and prosperity,” he said.

Mr Chalmers said Russia’s “unilateral, immoral and illegal” invasion of Ukraine had also undermined energy and food security – dramatically pushing up global prices.

“And all of this puts pressure on our economy and our Budget,” he said.

Opposition treasury spokesman Angus Taylor has called on the government to release a plan to deal with soaring inflation. Picture: NCA NewsWire / Gary Ramage

Mr Chalmers said there were things the government could control to ease conditions.

“A decade of energy policy paralysis – with not enough investment in cleaner, cheaper more reliable energy, and not enough certainty for investors – that’s pushed up power bills,” he said.

“A lack of the right investment in skills and local manufacturing capability – that’s seen our productivity flatline and supply chains break.

“The fault lies with a decade of wasted opportunities, wrong priorities and wilful neglect – that Australians are all now paying for.”

ECONOMIC GROWTH TO SLOW

Soaring inflation and a global slowdown has wiped more than $10 billion from Australia’s economy, with new forecasts showing the situation will get even worse next year.

Treasurer Jim Chalmers will unveil updated figures revealing the economy is only expected to grow by three per cent of GDP this financial year, and just two per cent in 2023-24 when he delivers a ministerial statement on Thursday.

This is a drop of 0.5 per cent each year from previous forecasts, with the gloomy Treasury figures commissioned by Mr Chalmers also showing last year’s growth is expected to be lower than previously hoped.

The new forecasts take into account higher than expected inflation figures, cost of living pressures, supply chain issues, the energy crisis and the war in Ukraine.

Treasurer Jim Chalmers will make a statement on Australia’s economy to parliament on Thursday. Picture: NCA NewsWire / Gary Ramage

In a speech to parliament, Mr Chalmers will acknowledge though Australia is outperforming much of the world economically, it “doesn’t make it easier to pay the bills at home”.

“The Australian economy is growing – but so are the challenges,” he will say.

“Some are homegrown, others come from around the world.

“Higher interest rates, combined with the global slowdown … will impact on Australia’s economic growth.”

Mr Chalmers will say Australia’s high inflation rate, which hit 6.1 per cent in the year to the end of June, would subside, but “not overnight”.

“(Inflation has) been turbocharged by a decade of domestic failures on skills, on energy and on supply chains which just aren’t resilient enough,” he will say.

Mr Chalmers on Wednesday said the latest inflation figures – the highest since the introduction of the GST – were “confronting,” and acknowledged many Australians were choosing between paying for “vegetables or rent”.

Opposition Treasury spokesman Angus Taylor says the government needs to release a plan to deal with rising inflation. Picture: NCA NewsWire / David Mariuz

Mr Chalmers said not “credible in the near-term” for him to promise pay rises would keep up with inflation, and warned the government could not “fund every good idea” to ease living pressures due to the $1 trillion budget debt.

Opposition Treasury spokesman Angus Taylor said the government could make “choices” to reduce the inflationary pressure on the economy.

“Families are feeling it at the bowser, in the supermarket, when they pay their power bills and when they renovate their homes,” he said.

“Labor went to the election promising to ease the cost of living, reduce electricity costs and increase real wages but it’s only getting harder for Australian households and the Government has offered no real plan to address these challenges.”

Originally published as Inflation ‘will get worse this year’ warns Treasurer Jim Chalmers