Hold your horses and watch your wallets, folks, the Reserve Bank is not done with inflation and inflation is not done with us.
Four weeks into the new financial year, and the bill shock is unrelenting.
Been to a restaurant or bought takeaway? Received your council rates and charges notice? Growled a little at surcharges creeping in every time you tap or buy something online?
Insurance premiums rose by more than 14 per cent in the year to June. Vet and other pet service costs increased by 7.7 per cent, while human grooming rose by 7.1 per cent over the same period.
Higher energy costs and rents, already at their fastest growth rate since 1988, are locked and loaded and will keep up the pulse on prices growth.
Services inflation is running at 6.3 per cent in the 12 months to the June quarter, and is at its highest rate since 2001.
This is the “sticky” part of inflation – due mainly to rising wages, energy costs and rents – that is worrying central banks the world over and is leading to aggressive interest rate rises.
In its latest update, the International Monetary Fund urges officials to maintain the rage of contractionary real interest rates (that is after inflation rates above “neutral”) “until there are clear signs that underlying inflation is cooling”.
With core inflation here at 5.9 per cent, after peaking at 6.9 per cent six months ago, and a 4.1 per cent cash rate, we won’t be in positive territory this year unless these two parties snuggle up.
The pandemic’s supply snarls and Russia’s invasion of Ukraine pushed up home-building and fuel costs, and were the drivers of strong growth in goods prices, which peaked at 9.6 per cent in the final two quarters of last year.
Now, as ABS head of price statistics Michelle Marquardt said, “price increases for a range of services like rents, restaurant meals, childcare and insurance are keeping inflation high”.
International holiday travel and accommodation costs rose by 6.2 per cent in the quarter, due to the Aussie scramble to escape for Europe’s summer.
Watch that space. The ABS will be raising the weighting in the CPI for foreign travel to reflect more locals holidaying overseas; that component is now set at 2 per cent, compared with 3.5 per cent pre-Covid.
RBA board members are clearly worried about the level and tenacity of services inflation.
According to the minutes from this month’s RBA meeting, “members noted that several CPI categories for which inflation was typically quite persistent already had too high inflation, including rent and services prices more broadly”.
“Furthermore, electricity prices had risen substantially on 1 July; while this was expected and had been incorporated in the staff forecasts for some time, there was a risk that the wider effects on inflation had not been fully captured,” the minutes read.
Tellingly, in outlining the case for the 13th rise in the cash rate target – of course, they decided to pause – they also observed “that weak productivity was contributing to strong growth in unit labour costs” and that labour productivity “was broadly unchanged since mid-2019”.
That’s one of the reasons RBA governor Philip Lowe has raised his voice about our woeful productivity growth, while he still has the floor, as it’s making the central bank’s job more difficult, as well as dooming us to lower material living standards.
On Tuesday, when the board meets, Lowe says they’ll conduct a full review of central forecasts for inflation and growth.
Right now, the RBA expects consumer inflation to return to the 2 to 3 per cent target band in mid-2025, and the jobless rate to rise from the current 3.5 per cent to 4.5 per cent.
“As part of that review, we will be assessing the many cross currents affecting the inflation outlook,” Lowe said in a speech this month.
“There are ongoing pricing pressures from several factors, including: the high level of capacity utilisation; strong growth in unit labour costs (mainly because of weak productivity growth); a big pick-up in rents; and higher prices for electricity.”
On the other hand, the RBA’s monetary assault was having the desired effect by squeezing household spending, Lowe said, and that’s likely to lead to a rise in the jobless rate.
If elevated inflation sticks around, the new-look RBA under incoming governor Michele Bullock will have to squeeze borrowers even harder.
It’s not over.
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