Rents, tariffs and other dangers that could cause inflation to rise again in Australia

New CPI numbers show underlying inflation has ticked up and it’s wise to watch these factors when pinning your hopes on future RBA rate moves.

Wednesday’s monthly Consumer Price Index numbers were a mixed bag for borrowers and savers wondering when the Reserve Bank of Australia will follow up this month’s official interest rate cut with another one.

While headline annual inflation was steady at 2.5 per cent, right in the middle of the RBA’s 2-3 per cent target band, the RBA’s preferred measure of inflation – the annual trimmed mean – ticked higher to 2.8 per cent in January.

And there are dangers lurking that could push inflation – and interest rates – up again, just as Aussies with big mortgages welcome their first dose of financial relief after a 62 per cent jump in home loan repayments since mid-2022.

The RBA uses rate moves as a crude lever to control inflation, but it’s effectively the only lever it has. Rate rises aim to put the brakes on the economy and consumer spending, while rate cuts are expected to fire things up.

It’s wise to watch these factors when pinning your hopes on future RBA rate moves.

High inflation has hurt home loan customers for close to three years. Picture: iStock

HOUSING

The new CPI indicator numbers show housing rents rose 5.8 per cent annually for the year to January 31. That’s down from 6.6 per cent in November but still almost twice as high as overall inflation.

It reflects the fact that Australia is not building enough houses to provide enough roofs over our heads, despite government pushes to boost construction. This supply and demand difference continues to hammer tenants, although vacancy rates in capital cities are rising.

If we continue to build too few homes for our people, housing-related inflation could jump again.

TARIFFS

Donald Trump’s first month in office has been a wild ride, especially when it comes to his plans to slap hefty tariffs – read taxes – on goods going into the US.

If this sparks trade wars on multiple fronts as other countries reciprocate with tariffs of their own, the price of everything will go up and Australia will end up importing higher inflation, as we did following the pandemic.

WAR

Another Trump tactic has been to stir up global geopolitics, buddying up to Russia’s Vladimir Putin while calling Ukraine’s president Volodymyr Zelensky a dictator – the exact opposite of how most of the world views Russia’s 2022 invasion of Ukraine.

Add to this, uncertainty around China and the Middle East and a global surge in defence spending, and wars become a big worry. Several global studies have found that wars typically increase inflation.

POPULATION

Australia’s net overseas migration has been rising at more than 500,000 people annually – twice what it was in 2019.

More people need more goods and services, pushing up demand and enabling price rises that fuel inflation.

These high migration levels have been the only reason Australia has avoided an official recession in recent times. On a per capita basis, our economy has been going backwards for close to two years – leading to falling living standards.

Economist reactions to Wednesday’s CPI numbers were generally positive but carried some warnings.

David Bassanese from BetaShares said it was good news for those hoping for a cut soon, and he forecast that it bodes well for another cut at the RBA meeting in May, while KPMG’s Brendan Rynne said the figures showed that February’s cut was “a lineball call” and the US tariffs would be inflationary. HSBC’s Paul Bloxham does not expect another cut until the second half of 2025.

Originally published as Rents, tariffs and other dangers that could cause inflation to rise again in Australia