‘So far so good’: Inflation signals easing as Australians cut back

Households are set to experience sub-par disposable income growth for years to come.

Households are set to experience sub-par disposable income growth for years to come. Photo: Getty

Australian households may be spared a Christmas interest rates hike amid “encouraging” signs that inflation has continued to ease over the December quarter, a leading economist has said.

Commonwealth Bank chief economist Gareth Aird says the most up-to-date figures on price growth in October suggest that the Reserve Bank will not deliver back-to-back rate increases.

In a note on Monday, he said inflationary pressures have “eased over the early part of the December quarter”, with readings of consumer prices and producer costs looking more positive heading into Christmas.

“The RBA has a hiking bias. But they are almost certain to leave the cash rate on hold at the December board meeting, following the November 25bp [basis point] rate increase,” he said.

“There was nothing in the Q3 23 WPI or October labour force survey to see the RBA pull the rate hike trigger again in December. And there is simply not enough other economic information ahead of the December meeting for the board to move rates higher.”

How inflation is easing

It comes as fresh data published by the nation’s largest bank on Tuesday showed consumers are cutting back on discretionary spending in response to higher rates.

That’s what the RBA wants to see because less discretionary spending will make it harder for firms to hike prices further without losing sales.

Younger Australians are being hit hardest, with those aged 25 to 29 years reducing their spending by 5.9 per cent – which increases to 10 per cent when adjusted for inflation.

Older Australians, however, continue to spend more on travel and eating out – this segment of the population is less likely to be paying down their mortgage.

Nevertheless, the nationwide consumer retreat is helping to cool the economy and ease inflation pressures, particularly for a range of goods.

Both the October National Australia Bank (NAB) business survey and the Melbourne Institute’s inflation gauge are also showing cost relief for firms, which will further reduce their incentive to pass on higher prices.

The NAB business survey showed prices growth for businesses eased to 1 per cent over the past quarter, which was the slowest pace since July 2020 when inflation was heading upwards.

Meanwhile, the Melbourne Institute gauge was also soft in October, with the headline falling by 0.1 per cent and the trimmed mean measure (which is key to RBA decision making) being flat.

“So far so good,” Aird said of the trajectory for inflation in late 2023.

Services prices remain key

But Aird’s view is different to that expressed by other economists who believe the fact that the RBA hiked in November is a sign that another looms in December, with annual wages growth hitting 4 per cent over the past quarter and the jobs market remaining historically very strong.

Oxford Australia head of macroeconomic forecasting Sean Langcake is predicting another hike, suggesting fears about services inflation will push the RBA into action for a second time in a row.

“We know they see a 25 basis point move [like the one in November] as almost imperceptible,” he said.

Langcake thinks the RBA is still worried about inflation for services to raise rates again, but we won’t get fresh data on this for some time.

The upcoming monthly consumer price index (CPI) due from the ABS on November 29 will primarily canvass price changes for goods, leaving the question of services inflation largely unknown before the RBA meets in December.

Central bankers are worried that rising wages growth and lacklustre productivity are combining to deliver stubborn inflation for services – including hospitality, tourism and things like grooming.

But high rents and insurance prices are also in the midst and have less to do with wages growth.

Services prices were particularly robust over the September quarter, which economists think sparked the first rate hike in four months from the Reserve Bank in November.

Langcake said robust services inflation shouldn’t be a surprise given the tight jobs market and rising wages growth in recent months – something the RBA has flagged repeatedly before.

Aird argues that with the latest services prices unavailable to central bankers before their December meeting, a pause is the likely outcome.

“The November monthly CPI indicator will be an important print for markets (due January 10),” he said.

“It will provide an official update on how market services prices are tracking in the December quarter. And importantly it will allow analysts to compare how the prices data in Q4 23 is tracking against the RBA’s expectations.”

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