As the spectre of a potential global recession continues to rise over most of the world, much of which is reeling from one crisis or another, Australia is left to hope that someway, somehow, our little corner of the South Pacific can once again avoid the worst of things.
When it comes to some key domestic issues such as inflation, the story is broadly similar. There is hope that inflation will peak later this year or during the first quarter of 2023, before being brought under control relatively swiftly.
Whether that will be the case or not remains to be seen, depending a great deal on how the global economic outlook will evolve in the coming months.
But when you start to get into the real nuts and bolts of how inflation could play out in Australia, it quickly becomes clear how challenging it could be to get it under control as swiftly as we would all like.
Rents
As of the latest inflation report from the Australian Bureau of Statistics (ABS) which covers up to the end of June, rental inflation is currently running at 1.6 per cent annually.
It’s at this point many of you are probably wondering how this could possibly be the case, considering that much of the nation is suffering from the worst rental crisis in at least a generation.
According to private housing data providers SQM Research, rents are rising faster than the 1.6 per cent reported by the ABS.
Going by SQM Research’s data, capital city rents have risen by 21.8 per cent in the last 12 months. Domain on the other hand sees capital city rents up 12.8 per cent in the year to the end of September.
It’s worth noting that the ABS and private providers like SQM technically measure different things. The ABS measures all capital city rents in aggregate, while SQM measures new asking rents for properties currently on the market.
While this has in the past led to a divergence between the ABS figure and those of private providers, well over a decade of data shows that eventually the ABS metric catches up.
Therein lays part of the problem. As it stands only a very small fraction of the increase in rents has fed into the headline inflation figures, so there is a whole lot of rental inflation to still be reflected in the ABS metric, potentially well over a year from now.
Electricity and gas prices
At the recent Australian Financial Review Energy and Climate Summit, Alinta Energy CEO warned that retail electricity costs would increase by 35 per cent in 2023.
The outlook for gas prices is equally concerning, with the current market price at more than double the median price seen during 2021.
While there is a chance that the rocketing cost of household energy could be short circuited by intervention from the Albanese government, whether or not that will occur and be successful is an open question.
Small weighting, big inflation
In Australia’s consumer price index (CPI) weighting, household energy bills account for 3.47 per cent of the index, with rents accounting for 6.23 per cent. Combined these two inputs make up less than 10 per cent of the overall CPI.
If the rental price increases seen by Domain were to fully feed into the CPI over a 12-month period, the rental component would contribute 0.79 per cent to the overall figure. If the larger increase seen by SQM was to be fully priced over the same duration, it would contribute 1.36 per cent to the headline figure.
Meanwhile, if gas and electricity prices were to rise by 35 per cent, it would contribute 1.22 per cent to the headline year on year inflation figure.
Despite being two generally minor contributors to the headline inflation rate, once put together under these scenarios we would see annual inflation at 2.01 per cent to 2.58 per cent on these two factors alone.
That doesn’t leave a whole lot of breathing room between these factors and the RBA’s 2-3 per cent inflation target band, let alone other inflationary pressures stemming from the remaining 90 per cent of the consumer price index basket.
This could further complicate things for the Reserve Bank, even if other inflationary pressures are somehow brought under control more quickly than forecasted.
Ultimately, without some form of intervention in the nation’s energy market by the Albanese government, it’s possible that the scenarios explored in this article may already be effectively baked in to at least some degree, along with the consequences for households and mortgage holders.
Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator
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