By Rachel Clun
We’re close to entering our low inflation era, after a three-year rollercoaster of rapidly rising prices.
The latest monthly figures from the Australian Bureau of Statistics showed inflation was 3.4 per cent in the 12 months to February, for the third month in a row.
Food and drink prices have continued to fall.Credit: Luis Ascui
Inflation has been falling for more than a year now. So what’s particularly interesting about a third month in a row of no movement on that front?
Firstly, the monthly figures can be volatile and many economists had expected inflation to be slightly higher in February than in January.
Instead, it fell in some key categories such as food and non-alcoholic beverages. Price growth there slowed to 3.6 per cent in the year to February, down from 4.4 per cent in the year to January.
But it seemed even Taylor Swift’s massive Eras Tour couldn’t get Australians to spend enough to put greater upward pressure on prices.
This brings us to the second point: services inflation has continued to fall, including in holiday travel and accommodation. The surge in hotel bookings and flights to Sydney and Melbourne to see Swift were more than countered by a drop-off in other holiday bookings as school holidays ended.
Economists and the Reserve Bank have been watching services inflation particularly closely because while goods inflation has been falling as post-pandemic supply chain pressures ease, service inflation has proven much more sticky.
Insurance inflation is a case in point – increases in insurance and financial service prices were a main driver of the February inflation number, and are up by 8.4 per cent over the previous 12 months. Insurance costs alone have risen by a whopping 16.5 per cent.
Rental inflation has also continued to rise, lifting to 7.6 per cent in the year to February, up by 0.2 percentage points from January as rental markets remain tight around the country.
Those services are essential for many people. And those ongoing price rises mean something has to give elsewhere in household budgets. So that means inflation is going to keep falling, as people pull back spending even further on things like going to cafes and restaurants.
This brings us to the third point – inflation is on track to fall a bit faster than the Reserve Bank was expecting.
Their forecasts from February show they expected inflation to reach 3.3 per cent by June, before slowly entering the bank’s target range of 2-3 per cent by the second half of next year.
The central bank uses the quarterly measure of inflation, which does not come out until the end of next month. But as Indeed’s Asia Pacific economist Callam Pickering pointed out, the monthly figures show we should expect inflation to fall fairly substantially over the coming months.
That’s good news in two ways. It means prices will very soon start rising at a slower rate. Hopefully, so slowly we stop noticing (the RBA’s target range is right in that sweet spot).
It also confirms that the bank no longer needs to raise interest rates, and if inflation slows dramatically we could even look forward to the first interest rate cuts coming sooner.
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