Jobs data and immigration spike make inflation task harder

The sharp fall in the unemployment rate to 3.7 per cent in February underpins the Reserve Bank of Australia’s uncertainty about where next for official interest rates.

While the expectation of many has been that rates will soon be trending down, RBA governor Michele Bullock has been sending mixed messages. She says what is needed is greater confidence that inflation will return to the target band in a reasonable time frame and will stay there. “We are not confident enough to say we can rule out further interest rate changes, but we do think we’re on the path to get ourselves back to inflation in target within our forecast period,” Dr Bullock told journalists at a briefing on Tuesday. The stronger-than-expected employment data, released two days later, is not what the RBA is looking for to indicate an easing of demand to cool inflation.

Neither are the official ABS Estimated Resident population numbers released on Thursday for the September 2023 quarter, which confirm that last year recorded the most rapid population growth since the post-World War II boom. The net migration intake is now outpacing new dwelling constructions by four to one and the housing industry is warning that even with zero migration, there still won’t be enough dwellings built to meet demand. This all adds up to higher housing costs and unhappy voters, who expect the government to do something about it.

High migration cuts both ways for the government. The high migration numbers are perhaps the only reason Australia has remained out of technical recession as high interest rates and energy prices have started to bite. As political editor Simon Benson explains, migration and the housing crisis are converging to become a singular and politically potent problem for the Albanese government. The last time dwelling approvals were this low was in 2012, and the Coalition looks like finally diving into the issue aggressively. This opens the way for more debate on new policy options, including enabling young people to access a portion of their superannuation savings to use as a deposit on a house. The Greens, meanwhile, have been cultivating renter dissatisfaction as a key weapon against the government.

Jim Chalmers is determined to stay focused on the positives, claiming a “trifecta” of falling unemployment, moderating inflation and real wages growth was the fruit of the government’s economic plan.

The challenge is whether or not inflation will moderate quickly enough to stop expectations of higher prices becoming entrenched, leading to more inflationary pressures. Despite assurances from the government, the danger of a prices and wages spiral is not beyond question. The absence of productivity growth, something that is not being addressed seriously by the government, is the biggest long-term danger on the economic horizon.

While justified, the high wage increases to low-paid workers in the aged-care and domestic sectors were made without any productivity trade-offs. The damage will come if unions in other industries are able to leverage off those wage rise decisions to secure high wage increases more generally.

Rather than restrict enterprise through industrial relations reforms designed to protect the trade union movement, the government must get back to growing the economic pie, something that is recommended by the RBA and all serious economic commentators.

The message from falling unemployment, rising immigration and housing, and rent stress is that government must redouble its efforts to help the RBA in its drive against inflation and desire to bring interest rates back down.