Hope is growing that Australia has turned the corner in the cost of living crisis with prices rising at their slowest rate in two years. Inflation has fallen to 6% in the year to June, down from 7% last quarter, making a 13th interest rate rise next week less likely.
Rising Rents And Moderating Inflation: Australia’s Economic Outlook
Australia’s economic outlook is currently shaped by rising rents and moderating inflation. The June quarter inflation has decreased to 6%, exceeding economists’ expectations. This development increases the likelihood of the Reserve Bank extending its interest rate pause.
Notably, rents have experienced a substantial increase, reaching their highest quarterly growth rate in 35 years. Despite this, the overall inflation rate has declined from the previous quarter’s 7%. Certain prices, such as domestic holiday travel, accommodation, and automotive fuel, have decreased during this period.
The trimmed mean, or underlying inflation rate, stands at an annual pace of 5.9% and 0.9% for the quarter. Evidence suggests that the Reserve Bank may have implemented excessive interest rate hikes, given the softening Australian economy, moderate wage growth, and stable medium-term inflation expectations.
The Reserve Bank aims for inflation to continue moderating towards a 2-3% annual rate by mid-2025. With consumer and business confidence remaining low, employers still adding jobs, and the jobless rate at historically low levels, the Australian economy faces a complex economic landscape.
Key Takeaways
- Australia’s June quarter inflation rate was 6%, which is higher than the previous year but lower than the March quarter.
- Rents experienced the fastest quarterly increase in 35 years, contributing significantly to inflation.
- The Reserve Bank of Australia may extend the interest rate pause due to the softening of the Australian economy and the evidence of increased interest rates.
- Despite the rise in rents and inflation, wage growth is not excessive, and medium-term inflation expectations are not rising.
Causes and Implications
The rise in rents, along with other contributing factors, has led to the moderating inflation in Australia. This has implications for the country’s economic outlook. Australia’s June quarter inflation rate of 6% was lower than expected by economists, indicating a decrease in inflationary pressures. This has increased the likelihood of the Reserve Bank extending its interest rate pause, as there is evidence that interest rates have been increased too far.
The softening of the Australian economy is evident, with consumer and business confidence low or falling. However, employers are still adding jobs at a strong clip, and the jobless rate remains near half-century lows. Despite this, the pace of inflation is peaking and moderating quickly. Wage growth is not excessive, and medium-term inflation expectations are not rising.
As a result, it is suggested that no further interest rate increases should occur in Australia. The Reserve Bank aims for inflation to continue moderating towards a 2-3% annual rate by mid-2025.
Impact on Housing Market
Housing market conditions in light of recent developments indicate significant implications for cost-of-living measures. Rising rents, which have recorded the strongest quarterly rise since 1988, have become a major propellant for inflation in Australia. Rentals increased by 2.5% for the quarter and 6.7% for the year, contributing to the overall increase in the consumer price index.
Additionally, the shortage of potatoes due to wet weather has placed pressure on prices for potato products. On the other hand, the cost of domestic holiday travel and accommodation, clothing accessories, and automotive fuel has declined, contributing to the trimming of the inflation rate.
The impact on the housing market is twofold: it has led to higher living expenses for renters and has also contributed to the moderation of inflation. These factors need to be considered in assessing the economic outlook and cost-of-living relief measures.
Government Responses
Government responses to the recent developments in the housing market and inflation include measures aimed at providing cost-of-living relief and addressing the impact on renters and overall consumer expenses.
The federal treasurer has welcomed the drop in inflation and highlighted the quarterly pace, which is now less than half the rate posted during the previous quarter.
In response, the government plans to implement more cost-of-living relief measures, including the largest increase in commonwealth rental assistance in 30 years. This move aims to alleviate the burden on renters who have experienced a significant rise in rents.
Additionally, the government aims to address the impact of rising prices on consumers by implementing measures to reduce expenses in areas such as domestic holiday travel, accommodation, clothing accessories, and automotive fuel.
These responses aim to mitigate the effects of rising rents and moderating inflation on the Australian economy and provide relief to affected individuals and households.
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