Australia to Experience 2nd Highest Inflation Rate Among Developed Nations in 2025: IMF

An exterior view of the building of the International Monetary Fund is seen in D.C. on March 27, 2020. Oliver Douliery/AFP via Getty Images

Australia is poised to record the second-highest inflation rate among advanced economies next year, according to projections from the International Monetary Fund (IMF).

This sharp forecast comes despite global inflation easing in many other countries, underscoring Australia’s unique economic challenges.

The IMF’s latest report reveals that by the end of 2025, inflation in Australia will rise to 3.6 percent, with only Slovakia expected to experience higher inflation among developed nations.

This projection places Australia in stark contrast to other advanced economies such as the US, UK, and the European Union, where inflation has steadily declined. While the global average converges towards pre-pandemic levels, Australia remains an outlier.

“It looks like the global battle against inflation has largely been won, even if price pressures persist in some countries,” the IMF said.

“In most countries, inflation is now hovering close to central bank targets, paving the way for monetary easing across major central banks,” it added.

Australia, however, is still lagging behind. The inflation rate was 3.8 percent in the June quarter, and according to the IMF, it is forecast to dip momentarily to 3 percent by the end of this year due to short-term government relief measures, only to rise again as these interventions fade.

Reserve Bank of Australia Governor (RBA) Michele Bullock made similar predictions last month after the GDP numbers showed a drop in headline inflation.

The IMF also downgraded Australia’s growth outlook to 1.2 percent for this year, down from its earlier forecast of 1.5 percent. This decline reflects both domestic inflationary pressures and global factors such as China’s slowing economy and rising global trade tensions.

Balancing Inflation and Employment

Australia’s approach has been more measured, opting for less aggressive monetary tightening than nations like the United States, to preserve employment levels.

Treasurer Jim Chalmers has repeatedly stated that while inflation control is a top priority, it must be balanced with maintaining employment levels.

“We’re still very focused on the fight against inflation,” Chalmers said during a recent interview, “but we’ve made really quite substantial progress. Better days are ahead, but there’s more work to do.”

Chalmers said Australia’s economic strategy has helped to effectively avoid a sharp rise in unemployment. This contrasts with countries with significant job losses due to aggressive inflation control policies.

Temporary Relief, But a Long Road Ahead

Australia’s consumer price index (CPI) is expected to temporarily drop to 3 percent by the end of 2024, with the help of government interventions aimed at easing the cost-of-living crisis.

These include energy rebates of up to $300 provided by the federal government, as well as further subsidies from states like Queensland, which offered rebates of up to $1,000.

Additionally, the Albanese government’s tax cuts, which came into effect on July 1, 2024, have provided a short-term boost to consumer confidence, with recent reports showing the highest confidence levels since January 2023.

However, these measures are set to expire by mid-2025, and when they do, inflation is expected to rise again, hitting 3.6 percent by year-end.

This projection is significantly higher than the IMF’s April estimate, which had pegged inflation at 2.8 percent. The revision reflects growing concerns that Australia’s structural inflation challenges are more persistent than initially thought.

Chalmers Prepares for Key Meetings in Washington

Treasurer Jim Chalmers will fly to Washington this week for a series of high-level meetings with finance ministers, central bank governors, and key international figures, including U.S. Federal Reserve Chairman Jerome Powell.

His discussions will focus on global inflationary trends, the prospects for global economic growth, and the impact of rising protectionism on trade.

With its persistently higher inflation rate, Australia’s situation will be central to Chalmers’ efforts to reassure international markets of Australia’s economic resilience.

Ahead of his visit, Chalmers acknowledged the IMF’s challenging outlook for Australia but expressed confidence that the nation’s approach, which prioritises inflation control and job protection, will be effective in the long term.

Chalmers is expected to discuss inflation strategies with Powell, U.S. Treasury Secretary Janet Yellen, and other key figures as the global financial community grapples with shifting monetary policies and trade dynamics.

Interest Rate Cut Delayed

Meanwhile, domestic expectations for interest rate cuts have been tempered.

On Oct. 22, RBA Deputy Governor Andrew Hauser pushed the timeline for any rate cuts to May 2025. He warned that while inflation may have peaked, it remains high enough to warrant caution in monetary policy.

Hauser pointed to Australia’s strong labour market, which has so far withstood the effects of high inflation and rising interest rates.

He noted that Australia’s unemployment rate remains one of the lowest among developed economies despite global shifts.

The current rate of 4.1 percent is expected to rise only slightly to 4.4 percent by 2025, making Australia’s jobs market more resilient than most of its global peers.