Yahoo Finance Falling inflation: Why it's good news for homeowners AND workers
Inflation continues to fall towards the RBA's target band.
It is unambiguously good news that inflation is falling.
It means cost-of-living pressures on consumers are easing and lower inflation is working strongly against any policy imperative that further interest rate hikes are needed.
Indeed, after pausing in the hiking cycle earlier this month, the inflation data should see the Reserve Bank (RBA) hold interest rates steady when it meets next Tuesday to discuss monetary policy settings.
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According to the monthly data, in the year to June 2023, the annual inflation rate was 5.4 per cent, well below the 8.4 per cent peak recorded in December 2023, and continuing an unrelenting trend lower in inflation over the first half of 2023.
But even better than that, when account is taken of price changes in the past six months, inflation was just 1.7 per cent in that time for an annualised rise of 3.5 per cent, a result that is within reach of the RBA target range of 2-3 per cent.
The quarterly data confirm the inflation fall too. In the June quarter, inflation was 0.8 per cent, the lowest quarterly result in three years and a rate that saw the annual inflation rate ease to 6.0 per cent, well below the peak of 7.8 per cent in the year to the December quarter, 2022.
The underlying inflation rate – the trimmed mean version the RBA likes to give greater importance to – eased to an annual increase of 5.9 per cent and, like headline inflation, is on track to return to the RBA target in the next six to 12 months.
With the domestic economy slowing, global inflation pressures lower and the government keeping a very tight grip on fiscal policy - with its strategy to deliver budget surpluses - inflation will continue to ease over the next year.
The big question for policy makers and financial markets is the speed of that fall, and the time it will take for inflation to get back to the 2-3 per cent target band.
The RBA has a gloomy view on that, which is why it has unexpectedly continued its hiking cycle through the first half of 2023. On its latest forecasts, it has the inflation rate only gradually falling to 3 per cent - the top of the target band - in the middle of 2025 – still two long years away.
It will provide revised forecasts next Friday, with the Quarterly Statement on Monetary Policy. With inflation undershooting its most recent forecasts and, with growth lower too, a downward revision to the inflation outlook with an earlier return to the target band is on the cards.
The good news will get better
By the end of 2023, Australian workers are likely to see some even better news, with the annual rate of inflation falling below the rate of wage increases. In other words: real wage rises - something that will be a welcome turn from the years of troubling real wage declines.
In terms of the numbers, the momentum is such that inflation is forecast to be around 3 to 3.5 per cent and wages growth around 3.75 to 4.25 per cent, meaning real wages will be up.
This is likely to support household spending, which has been very weak over the past year, and it could also alleviate some of the mortgage stress that appears to be rising as the impact of the past RBA interest rate hikes comes through.
The bottom line is that inflation is falling and will get ever lower in the next six to 18 months. This means the RBA will be reluctant to hike rates further as it sits back and watches the economy move to a favourable blend of low inflation and low unemployment – provided it doesn’t jump at shadows and hike interest rates again.
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