Yahoo Finance Interest rate cuts ahead as huge problem 'beaten'
Rent, insurance and bread are among things that aren't getting cheaper, but there's a light at the end of the tunnel.
The recent bout of high inflation has been one of the biggest economic problems of the past few decades. It inflicted a cost-of-living crunch to all consumers as the purchasing power of wages and savings went backwards.
The good news is that, over the past year, annual inflation has fallen sharply, to now be at 3.4 per cent in January, which is the lowest since late 2021. Inflation is set to be within the Reserve Bank of Australia’s (RBA) 2-3 per cent target range in coming months. For the cost-of-living problem, inflation is now below the rate of wage increases, which is boosting purchasing power.
So, the RBA needs to as: “Is the 4.35 per cent cash rate and the 425 basis points of interest rate hikes between May 2022 and November 2023 still appropriate with inflation under control, the economy weak and the unemployment rate rising at a worrying rate?”
The answer is “no”. As a result, prepare for interest rate cuts in the no-too-distant future.
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Prior to the COVID pandemic, annual inflation was low, hovering around 1.5 to 2 per cent. Inflation fell during the lockdowns in 2020 and 2021 to around zero, but the cocktail of massive government spending, supply chain disruptions, money printing and extreme interest rate cuts during the pandemic sparked inflation. It skyrocketed from the middle of 2021 to reach a peak of 8.4 per cent in December 2022.
A series of aggressive interest rate hikes, the scaling back of the fiscal policy stimulus and the resolution of supply chain problems saw the economy weaken and, with it, inflation fall.
The latest inflation data show that, in annual terms, there are big divergences between the items whose prices are falling and those still rising at a rapid rate.
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What prices are dropping, and what's getting more expensive?
Prices are down for meat and seafood (-2.0 per cent), gas and household fuels (-1.4 per cent) and holiday travel and accommodation (-7.1 per cent).
There were small annual increases for fruit and vegetables (1.6 per cent), clothing and footwear (0.4 per cent), electricity (0.8 per cent), furnishings and household equipment (0.3 per cent) and communications (2.0 per cent).
In contrast, strong price increases were seen for bread and cereals (7.4 per cent), non-alcoholic beverages (5.7 per cent), tobacco (10.7 per cent), rents (7.4 per cent) and insurance and financial services (8.2 per cent).
Inflation never moves in a straight line up or down, or even sideways, and price variations on a wide range of items fluctuate from month to month – petrol and travel costs are illustrative items that usually show significant monthly volatility.
The momentum on inflation has been squarely to the downside for more than a year, with the weak economy and the increase in the unemployment rate associated with the economic slump keeping downward pressure on inflation.
Every forecaster is expecting further falls in inflation through 2024, with the only serious point of contention being the speed at which it falls and, importantly, when it is on track to hit the midpoint of the RBA’s target range.
The RBA is among the most pessimistic, with expectations for inflation still to be 3.3 per cent in the June quarter 2024, 3.2 per cent in the December quarter 2024, and 3.1 per cent in the June quarter 2025.
This looks wrong.
The June quarter 2025 is 18 months away and, with weak economic conditions and inflation already tracking around 3.4 per cent, there seems a strong probability that inflation could be at least a full percentage point lower than the current RBA projections.
The fall in inflation has opened the door for the start of an interest rate cutting cycle from the RBA. The board meeting where an interest rate cut becomes a “live” discussion is the one scheduled for May 7. This will be shortly after the release of the comprehensive March-quarter inflation data and by which time there are two more readings on the labour market, retail spending and a raft of other indicators.
Over that time, global economic news will be vital. Growth and inflation news from China, the US, the Eurozone and other parts of the world will be available.
Suffice to say, the inflation problem has been beaten and inflation is now on a glide path to the RBA target.
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