Inflation to return to target, but ‘more work to do’

The budget for beginners

Source: The New Daily

Federal budget forecasts have delivered a surprise bonus for the government, revealing inflation is falling faster than predicted.

Treasury predictions in the budget, which will be handed down on Tuesday, show inflation dropping to 2.75 per cent by December.

The forecasts also show inflation remaining at 2.75 per cent by the middle of 2025, before a further drop to 2.5 per cent by the end of that year.

The modelling in the budget shows inflation falling back to within the Reserve Bank of Australia’s target range of 2 to 3 per cent, almost a year earlier than the bank had forecast at its May meeting.

Finance Minister Katy Gallagher said it showed the budget had made progress on inflation, but there would still be a focus on alleviating cost-of-living pressures and future economic growth.

“The job isn’t done yet,” she told the ABC on Monday.

“We’re very mindful of the economic circumstances that we’re operating in at the moment – there’s challenges but opportunities in that as well.”

Unemployment, for example, is expected to rise from 3.8 per cent to 4.5 per cent over the next 12 months.

“That’s been the discussion about the narrow path – how do you moderate inflation without smashing the economy?” Gallagher said.

Treasurer Jim Chalmers said inflation, which was at 3.6 per cent for the year to the March quarter, was moderating faster than Treasury previously expected.

“The budget will put downward pressure on inflation, not upward pressure on inflation. Our budget will be part of the solution to the cost-of-living pressures, not part of the problem,” he said.

Opposition finance spokesperson Jane Hume noted this was a more optimistic outlook than other economists had predicted.

“It’s certainly very different from the RBA forecast that was made only six days ago,” she told ABC radio.

“I suppose it’s really up to the Treasurer now to tell us exactly how the government is going to bring inflation back down sooner.”

But Gallagher said the difference between the Reserve Bank and Treasury’s forecasts were to be expected, as the Albanese government’s predictions considered decisions made in the budget.

“Obviously, that wasn’t available to the RBA, so I don’t think there’s any surprise that there’s a bit of a difference,” she said.

In December’s mid-year budget update, Treasury predicted an inflation figure of 3.75 per cent to the year to June 2024.

Chalmers’ third budget as treasurer is also expected to show a softer outlook for growth in the years ahead, with GDP downgraded.

Real GDP growth is predicted to be 2 per cent in 2024-25 and 2.25 per cent in 2025-26, both 0.25 per cent lower than previous Treasury forecasts.

The forecasts show lower estimates for inflation, but the budget papers say that there remains “considerable uncertainty around the outlook for the domestic and global economy”.

“Inflation is still the big near-term challenge in our economy, which is why the government is doing its bit in the budget,” Chalmers said.


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