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Essential cost behind rates pain

RBA RATES MEETING
The fresh forecasts showed stalling progress on inflation. Picture: NCA NewsWire / Dylan Coker

The Reserve Bank has dramatically hiked its near-term inflation forecasts, showing progress is expected to stall as soaring costs at the fuel bowser and a still-tight jobs market cause a rebound in prices.

According to updated quarterly forecasts, released by the Reserve Bank on Tuesday as it also unveiled its latest cash rate decision, headline inflation is expected to further accelerate to 3.8 per cent in the June quarter, and hold at this level until year’s end.

In February, the RBA’s staff forecasts showed inflation easing to 3.2 per cent by December 2024.

RBA RATES MEETING
Fresh forecasts released by the Reserve Bank show progress on inflation is expected to stall in the near-term. Picture: NCA NewsWire / Dylan Coker

“The recent rise in petrol prices and unwinding of electricity rebates are each expected to add 0.25 percentage points to year-ended inflation in the December quarter,” the fresh forecasts read.

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But from 2025, the central bank predicts inflation to begin easing once again, falling to 3.2 per cent according to staff forecasts.

Despite the near-term upgrade to its headline CPI, inflation is still expected to fall within the RBA’s 2 to 3 per cent target by band by December 2025 – in line with February’s staff forecasts.

Importantly, the RBA’s forecasts preclude any measures yet to be announced in the May budget, to be delivered in a week’s time, meaning widely anticipated measures that will reduce measured inflation, such as power bill subsidies, are not factored into the predictions.

Speaking on Tuesday morning, Treasurer Jim Chalmers said that yet-to-be-announced budget measures had not been factored into the central bank’s forecasts.

With inflation expected to be higher in the near-term, the RBA expects real wages growth will be crunched through the second half of 2024 – as price pressures keep pace with the rise in pay packets, and potentially derailing the Albanese government’s promise to “get wages moving”.

“Wages growth appears to have peaked for workers on individual arrangements, whose wages are most responsive to current labour market conditions,” the RBA’s quarterly forecasts read.

As monetary policy slows the economy as intended, the RBA also expects the unemployment rate to rise, albeit less than previously anticipated.

The key jobless measure will climb to 4.2 per cent by the end of 2024, and rise to 4.3 per cent through 2025 – 0.1 percentage points higher than previously.

The effect of Australia’s red hot jobs market on labour costs, particularly in labour-intensive services like education, healthcare and insurance, was also cited as a concern by the RBA.

“Unit labour costs represent a particularly large share of input costs for many services firms and continue to grow strongly,” the RBA said.

ECONOMIC GENERICS
Under pressure from inflation and interest rates, household consumption is expected to be further squeezed in coming months. Picture: NCA NewsWire / David Crosling

Granted the squeeze of higher inflation and still elevated interest rates, the central bank expects household consumption will slow to just 0.1 per cent by June 2024.

However, from there this measure will be markedly strongly than previously anticipated as the Albanese government’s stage three tax cuts take effect from July 1, deliver a boost to take-home pay.

“Consumption growth remains subdued for most of 2024, despite real income growth picking up in response to strong labour income growth, a smaller drag from declining inflation, and the stage three tax cuts,” the RBA added.

As household remains weak, economic growth is also expected to remain sluggish in the near-term, with the Australian economy expected to expand by just 1.2 per cent in the six months to June, rising to 1.6 per cent in December.

Previously, the RBA had expected GDP to expand by 1.8 per cent by year’s end.