Living costs soar but rates unlikely to rise next week

While economists believe another interest rate increase is unlikely when the Reserve Bank board meets next week, new economic data released on Wednesday suggests a fall in rates remains a distant prospect. The data gives the central bank something of a dilemma. Australian Bureau of Statistics figures show inflation headed in the wrong direction in the year to the end of June, rising to 3.8 per cent, compared with 3.6 per cent in the year to March. It was the first increase in the consumer price index for 18 months, and it is considerably higher than the RBA’s 2-3 per cent target rate, which governor Michele Bullock has said the bank will do “what is necessary” to achieve.

Higher prices for vegetables and fruit, clothing and petrol (up 7.7 per cent for the year) contributed to the rise. So did rising rents and housing costs, driven by higher labour and building material costs. Because of a chronic lack of available homes, rents were 7.3 per cent higher in the year to June, and the annual increase in building costs was steady at 5.1 per cent. In Perth, Patrick Commins reports, rents rose by 10 per cent in the year to June, and building 18 per cent.

On the other hand, the RBA’s preferred measure of underlying inflation, which removes more volatile price movements for commodities such as petrol and fruit and vegetables, dropped to 3.9 per cent in the year to June, from 4 per cent in March. That suggests the bank will probably leave rates on hold. Retail trade figures also released on Wednesday confirm that likelihood.

Amid economic uncertainty, retail spending was subdued, the ABS reported, with the volume of turnover falling by an estimated 0.3 per cent in the June quarter. That trend, partially caused by the impact of 13 interest rate rises on householders’ discretionary spending, is part of the reason for a surge in businesses failures. Figures released last week by the Australian Securities & Investments Commission show business failures surged to a record high last financial year, with 11,049 insolvency appointments, up about 40 per cent on 7942 appointments the previous year. Cafes, restaurants, accommodation providers and small retailers were among the businesses hardest hit. Those trends could also influence the RBA board’s thinking on Tuesday. Westpac chief economist Luci Ellis told The Australian the CPI figures cemented her view that the RBA would be able to offer mortgage relief at its November meeting. “This confirms that the RBA will not need to hike rates again,” Dr Ellis said.

That would be good news for householders struggling under the effects of high mortgages and living costs. Jim Chalmers is probably breathing easier with the prospect of further rate rises receding. But the CPI, retail trade and insolvency figures show many Australians are still struggling. And the electorate is cranky. Australia’s inflationary outlook is less clear-cut than that of the US, where it is cooling. This suggests a rate cut in the US could be imminent or be made no later than September.

In making its decision next week, the RBA board also will take into account the likely effect of extra government money being pumped into the economy with the start of the stage three tax cuts and new federal and state spending. The bank has made it clear that the level of state and federal government debt and spending is a concern. Last week, independent economist Chris Richardson said an extra $46bn was being poured into the economy this financial year – equivalent to the “best part” of 2 per cent of national income. That was huge relative to the amount of money the RBA’s rate rises had taken out of the economy, he said: “If your yardstick is (whether governments are) helping or hurting the Reserve Bank to fight inflation, then they’re clearly hurting.”