Australia to struggle with inflation for longer in gloomy economy prediction

Aussies struggling with the cost of living have been issued a dire warning as one economist predicts a major collapse in household incomes.

Australians have been warned the inflation crisis is set to linger longer than expected as the Treasurer ramps up his rhetoric ahead of the upcoming budget.

Jim Chalmers, who will hand down his second budget on May 9, is in Washington for high level talks with his G20 counterparts which he says will be crucial to framing the economic statement.

While a global recession could not be ruled out, the Treasurer reiterated his hope Australia could dodge a downturn at home – despite persistently high inflation.

“We expect inflation in Australia to be higher than we’d like for longer than we’d like. This inflation problem in the global economy and in our own economy is a persistent one,” he told reporters in the US.

Jim Chalmers is putting his final touches on the upcoming budget. Picture: NCA NewsWire / Sarah Marshall

“We enter this new period of global economic certainty from a position of relative strength. We are confident but not complacent about how this will play out,” he said.

“We are optimistic about the future. but we are realistic about what a global downturn would mean for our economy.”

Earlier this week, the International Monetary Fund forecast the Australian economy would grow by just 1.6 per cent this year, followed by 1.7 per cent through 2024.

The Reserve Bank of Australia’s aggressive tightening of interest rates, from 0.1 per to 3.6 per cent over the past 11 months, was a major factor in the domestic slowdown.

Inflation peaked at 8.4 per cent in December, and fell to 6.8 per cent in the 12 months to February.

There are fears the sharp uptick in inflation could lead to a collapse in household incomes. Picture: Dan Peled / NCA NewsWire

The RBA forecasts inflation to decline to 4.75 per cent over 2023 before easing to around 3 per cent by mid-2025.

Despite the Treasurer’s optimism, there are fears household incomes could collapse as higher interest rates take its toll on paypackets.

“This will only get worse through 2023 on the lagged effect of higher interest costs and as wages growth struggles to keep up with the pace of inflation,” Commonwealth Bank chief economist Stephen Halmarick told the Nine Newspapers.

In his gloomy forecast, he predicted the RBA could be forced to cut interest rates by the end of the year as the economy slowed.

Dr Chalmers said the government was responding to the “complex and challenging” environment.

“We do understand that people are under the pump, we‘ll help where we can but we’ll do that really responsibly because the best thing that we can do as a government when the global economy is as weak and as complex and challenging as it is right now is to provide that responsible economic management at home,” he told Nine.

Originally published as Australia to struggle with inflation for longer in gloomy economy prediction