Living standards to fall harder for longer, says RBA

Workers will endure a further six months of falling real wages, after the Reserve Bank said a hotter than expected economy in 2023 would leave inflation substantially higher.

RBA governor Michele Bullock. Picture: Bloomberg

Australians will have to endure another year of falling living standards, after the Reserve Bank said surges in migration and infrastructure spending would drive a hotter than expected economy in 2023 and leave inflation substantially higher than expected by the end of this year and into next.

The RBA’s quarterly Statement on Monetary Policy – the first under new governor Michele Bullock – also revealed a sharp ­deterioration in forecast real household disposable income, which was projected to fall by 2 per cent this year.

The RBA said this week’s interest rate hike had put the nation back on to the “narrow path” to bringing annual consumer price growth back within the 2-3 per cent target range by late 2025 without crashing the economy.

But the task was getting harder, the report said, and economists noted that the RBA’s latest economic outlook set the scene for another rate increase as soon as the February board meeting.

“The weight of recent information suggests that the risk of ­inflation remaining higher for longer has increased,” the report said. “The updated forecasts have inflation in Australia higher in the near term and taking a bit longer to return to the top of the bank’s target range.”

The report revealed that, instead of improving, living standards would continue to slide through to mid-2024, with real household income projected to fall by 1.1 per cent in the year to June, against a previous forecast for a 0.4 per cent rise.

With high cost of living the number one issue among voters, Jim Chalmers on Friday again touted the inflation-fighting credentials of Labor’s budget management, after Fitch Ratings reaffirmed the country’s AAA credit rating. “The Albanese government’s combination of budget restraint, investments to lift the capacity of the economy, and targeted cost-of-living relief is all helping ease inflation in our economy,” the Treasurer said ahead of the return of MPs to parliament next week.

Despite these efforts, the RBA said annual price growth was now expected to only ease from 5.4 per cent in September to 4.5 per cent by December, materially above the 4.1 per cent in the bank’s August forecasts.

Inflation by the middle of next year will also be higher than anticipated – at 3.9 per cent versus 3.6 per cent – before falling sharply to 2.9 per cent by the end of 2025, or above the previous forecast of 2.8 per cent, the new forecasts reveal.

The RBA reiterated that the central bank remained “resolute in its determination to return ­inflation to target and will do what is necessary to achieve that ­outcome”.

“Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable time frame will depend upon the data and the evolving assessment of risks,” the report said.

As galloping population growth swells demand in the economy despite shrinking real GDP per capita, the SOMP showed price growth for a range of “market services” – from car ­repairs, to hairdressing and veterinary services, eating out and ­insurance premiums – was still running at about 7 per cent in the year to September. Annual rent inflation was at nearly 8 per cent and accelerating, adding to ­business costs and hurting ­renters.

“The prices of these services, which cover around one-fifth of the CPI basket, are among the most sensitive to domestically generated inflationary pressures,” the report says.

“High inflation in this category reflects the still-robust level of demand and continued pressure from input costs.”

NAB head of market economics Tapas Strickland said he ­anticipated another RBA rate hike in February, saying there was a “disconnect” between Ms Bullock’s apparent reluctance to hike again, versus a set of forecasts showing the central bank “barely” achieving its 2-3 per cent inflation target in two years.

Core to the central bank’s upgraded forecasts was a more resilient than expected economy in 2023, although the pace of growth remained relatively subdued.

The economy would expand by 1.6 per cent this year, instead of 0.9 per cent, the report said.

The RBA said what happened to household consumption from here remained “a key source of uncertainty for the economic ­outlook”.

“Many households are experiencing a painful squeeze on their finances, through higher inflation and interest rates,” the central bank said.

“At the same time, many are benefiting from rising housing prices, substantial savings buffers and higher interest income.”

The RBA said weaker household consumption had been more than offset by the added demand from the breakneck pace of ­migration and strong business and government investment spending.

“Business investment and public demand are expected to continue to contribute to output growth in coming quarters, ­supported by strong population growth, an easing in supply constraints and a large pipeline of projects, including for public infrastructure,” the report says.

The Albanese government has completed a full review of its $120bn infrastructure pipeline, but is yet to release details on which projects could be delayed or cancelled.

The International Monetary Fund recently concluded that the public works program was adding to inflation and leading to further cost and time blowouts in the delivery of projects.

CBA head of Australian ­economics Gareth Aird said his base case was that the cash rate had peaked at 4.35 per cent, but that the new forecasts revealed a move to 4.6 per cent was a “live” possibility at the February ­meeting.

“If population growth remains elevated or consumption strengthens due to rising home prices, it could make the RBA’s job of returning inflation to target more difficult,” he said. “In such a scenario the cash rate may sit at its peak in the cycle for longer than we currently anticipate.

“Fiscal policy is also a key source of uncertainty. Any loosening in fiscal policy at either the state or federal level would put upward pressure on demand and by extension inflation.

“Working the other way is the risk that the lagged impact of interest rate increases weighs more heavily on the consumer in 2024.”