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Inflation past the peak, but still a long road ahead

The Consumer Price Index (CPI) release today showed that inflation grew by 1.4% over the March quarter of 2023, and 7.0% over the past 12 months.

This confirms we are past the peak of 7.8% seen in late 2022. The downward path has commenced but inflation is still not expected to reach the RBA target band for some time – September 2024 on Deloitte Access Economics’ thinking, and not until mid-2025 on the RBA’s own forecasts.

The composition of price growth is changing. Supply constraints are now less of a driver of price pressures, but price growth may remain sticky in some key domestic sectors. Broadly, we are moving from goods prices being the driver of inflation to a more even balance between goods and services.

The housing sector leads the way on annual price growth, with prices up 9.8% over the year to March 2023. This included 12.7% growth in new dwellings by owner-occupiers, and 4.9% in national rental prices.

Rental prices are coming into sharper focus, given the extremely low rental vacancy rates across the country. The rental component of the CPI is expected to continue increasing as leases are re-negotiated throughout the next year. There is also some disparity across housing stock. According to CoreLogic, advertised rental growth for units has been materially faster than houses across most capital cities as renters look for more affordable options. For example, growth across the unit sector (18.1%) in Sydney was almost double that recorded for houses (9.4%).

Energy prices have risen considerably, with gas and other household fuel prices increasing 26.2% over the year and electricity prices increasing 15.5% over the year. The Australian Energy Regulator has noted that despite government intervention in late 2022, electricity prices remain much higher than a year ago, and are forecast to increase. Power bills in New South Wales, South Australia and Queensland are set to rise by up to 23.7% in July 2023. In Victoria, this is expected to reach as high as 30% for households, based on the Victorian Essential Services Commission’s default offer.

There are other parts of the inflation story consumers will keep noticing. Food and non-alcoholic beverages increased this quarter by 1.6%, with 8.0% growth over the year. Higher grocery costs will cut further into household budgets, creating additional pressure for consumers to reduce discretionary spending.

Chart 1: Australian headline CPI inflation

Source: ABS CPI

After 350 basis points of increases in the cash rate, the Reserve Bank’s pause in April was welcome – a breather to allow time to see the impact on both prices and the real economy so far.

Today’s release was the smallest quarterly increase since March last year and is consistent with inflation now receding. But it will still take considerable time to get back in the comfort zone. In relation to next week’s RBA decision, today’s release was very much in the grey zone, not providing a strong guide either way.

This blog was co-authored by Himaushu Hardikar, a Graduate in the Deloitte Access Economics team.

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