A key government projection that inflation will fall back into the RBA’s target range by the end of 2024 will be hard to achieve, leading economists have warned before the federal budget.

Treasurer Jim Chalmers will publish budget projections on Tuesday in which inflation eases from 3.6 per cent to 2.75 per cent by the end of 2024, and to 2.5 per cent in 2025, AAP reported.

It’s all part of a plan to address price pressures with a carefully calibrated cost-of-living package that is slated to extend energy bill subsidies for families and may even deliver some rent assistance.

But economists said stubborn price pressures mean the inflation prediction will be tough, with the RBA itself predicting inflation will end 2024 at 3.8 per cent and not hit target until 2025.

Indeed APAC economist Callam Pickering said the budget projection is a “tall order”, particularly after March-quarter Consumer Price Index (CPI) was higher than was hoped.

“[While] the RBA’s forecast for inflation this year and next is perhaps too pessimistic, the federal government’s view is perhaps too optimistic,” Pickering said.

“Somewhere in the 3.25 per cent to 3.5 per cent range is more likely by year end.”

‘Accounting trick’

Government hopes that the cost-of-living crisis will abate before voters head to the polls in 2025 have shaped the budget, with the projections implying the RBA could consider rate cuts this year.

Chalmers has been touting a package of energy subsidies in last year’s budget as an example of how the budget can deliver relief to families while acting to ease measured inflation rates.

That policy was estimated to have reduced headline CPI by about 0.5 per cent in the past year and is now slated to be extended as the government looks to replicate the move in other areas.

“It will engage in this fight against inflation by showing restraint, by designing our cost-of-living policies in a way that take the edge off inflation rather than add to it,” Chalmers says of the budget.

But University of New South Wales professor Richard Holden argued inflation can’t be fixed with spending, accusing Chalmers of an “accounting trick” that won’t change the interest rates outlook.

He said subsidies run the risk of increasing demand, which could worsen inflationary pressures.

“This isn’t reducing inflation, this is reducing measured CPI [Consumer Price Index],” he said.

“Subsidies are a stimulus … they free up money for people to spend on other things – it’s called cost-of-living relief, not some extra savings.”

Economist Saul Eslake suggested the devil will be in the details, saying cost-of-living relief could reduce measured inflation without delivering significant upwards pressure on the inflation rate.

“Nominal GDP will be about $2.7 trillion in 2024-25, so measures with a total cost of, say, $2.5 billion will amount to less than 0.1 percentage point of GDP,” he said.

“I would judge [that] as not being ‘material’ enough to have a measurable (upward) impact on inflation.

“We have to ‘wait and see’ how big, how well targeted, whatever ‘cost-of-living relief’ measures are in the budget.”

‘Enormous’ inflation gap

Oxford Australia head of macroeconomic forecasting Sean Langcake said the government will need to unveil quite a big package of relief to account for the “enormous” gap to RBA forecasts.

He doubted inflation would ease to the top of the 2 to 3 per cent RBA target band by the end of 2024, particularly as headwinds such as higher global oil prices plague the second-half outlook.

“Unless those subsidies are way bigger than the first time around … the impact on measured CPI is going to be smaller than it was last time,” Langcake said.

RMIT University Associate Professor Angel Zhong said Treasury’s projections were “optimistic”, with outcomes depending on how budget policies play out, including cost-of-living relief.

“Considering external factors like the current trends in inflationary pressure seen in other regions globally, it’s probable that Australians may experience relief sooner than initially projected by the RBA earlier this year,” Zhong said.

The extension of energy bill subsidies and the distinct possibility the government could now implement that model in other areas like rents also creates other challenges, Holden said.

Namely, while these measures reduce measured inflation initially, they have the opposite effect when they expire, adding back to the Consumer Price Index (CPI) figure published by the ABS.

And that’s something the RBA will be cautious of when deciding changes to interest rates.

“The RBA understands as well as anybody what’s going on, and they’re thinking about what inflation really is – not some accounting number,” Holden said.

“They understand these things [subsidies] aren’t going to go on forever.”