Economists Express Caution Despite Drop in Australia’s Inflation Rate

People shop for fresh produce at the Queen Victoria Market in Melbourne, Australia on July 4, 2023. William West/AFP via Getty Images

Australia’s inflation rate has slowed to 2.8 percent, marking its lowest level since March 2021 and returning to the Reserve Bank’s target range for the first time in three years.

This drop is largely attributed to lower petrol prices and cost-of-living assistance measures aimed at easing household financial burdens.

However, economists are raising concerns about underlying inflation, particularly the trimmed mean inflation rate, which stands at 3.5 percent. This figure, which excludes volatile prices, signals continued price pressures in essential services.

Trimmed Mean Inflation Remains Elevated

Westpac economist Justin Smirk expressed optimism regarding progress on underlying inflation but noted that a 3.5 percent trimmed mean inflation remains stronger than the Reserve Bank of Australia (RBA)’s target.

“Such a result indicates that while the annual pace may drop from 3.9 percent in the June quarter to 3.5 percent, it still reflects persistent inflationary pressures in essential sectors,” he stated.

Analysts attribute the decline in the overall inflation figure to falling petrol prices and government support, but the increase in housing costs—particularly rents—continues to pose challenges.

Stressed borrowers and a federal government gearing up for an election are hopeful for weaker inflation numbers, which could pave the way for interest rate cuts.

Potential for Interest Rate Cuts

Shane Oliver, AMP’s chief economist, believes that interest rate cuts could occur as early as December provided that trimmed mean inflation meets forecasts and underlying inflation trends continue to decrease through October.

“Our base case remains for the RBA to start cutting rates in February next year, but we can’t rule out a December cut if the numbers align,” Oliver remarked.

RBA is expected to hold a meeting next week to discuss a revision on interest rates.

While global central banks have begun to ease monetary policy amid slowing inflation rates, Oliver pointed out that Australia’s inflationary pressures may not be worse than those elsewhere. Instead, Australia’s inflation likely peaked later, suggesting that it may take longer to return to lower levels.

On Oct. 22, RBA Deputy Governor Andrew Hauser pushed the timeline for rate cuts to May 2025, cautioning that while inflation may have peaked, it remains sufficiently high to justify cautious policy moves, depending heavily on the interplay between inflation rates, government policy, and global economic trends.

IMF Recommends Restrictive Fiscal Policy

In a recent report, the International Monetary Fund (IMF) advised the Australian government to adopt a more restrictive fiscal policy to tackle persistent inflation.

While acknowledging that cost-of-living support measures may temporarily lower prices, the IMF warned that these initiatives could also stimulate broader economic activity, potentially complicating the inflation landscape.

The IMF report highlighted the recent tax cuts aimed at increasing disposable income for households, raising concerns about the broader economic implications of such measures.

AAP has contributed to this article.