**Inflation Pressures Persist in Australia: Implications for RBA Tightening Policy**
**Original article by Rob Carnell, Head of Research and Chief Economist, Asia-Pacific at ING. Additional background and context are provided from recent Reserve Bank of Australia statements and economic data.**
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**Australian Inflation: The Rebuilding of Risks**
Recent economic data suggest that inflationary risks in Australia are rebuilding, challenging earlier expectations that price pressures might soon ease. The latest figures point to strong wage gains, surging services inflation, and ongoing cost pressures that keep underlying inflation measures above the Reserve Bank of Australia’s (RBA) 2-3 percent target.
This mounting inflationary pressure is prompting renewed debate about the future path of monetary policy. With the potential for more persistent inflation, the RBA may be compelled to consider further rate hikes or, at the very least, maintain elevated interest rates for an extended period.
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**Key Features of the Current Australian Economic Landscape**
– **Services Inflation Remains Elevated**
The main driver of persistent inflation in Australia is the services sector. Month-on-month and year-on-year numbers highlight particularly strong price increases in areas such as health, education, insurance, and personal care.
– **Tradable Goods Show Signs of Easing**
While services prices continue to climb, tradable goods inflation (covering imported items and other goods exposed to the global market) has eased back more rapidly, thanks in part to improved global supply chains and normalizing shipping costs.
– **Labour Market Tightness**
The Australian labour market remains historically tight. Unemployment remains at low levels, and several sectors are reporting shortages of skilled workers. Robust employment data signal upward pressure on wages.
– **Wage Growth is Accelerating**
Wages have begun growing at a faster pace. The Wage Price Index rose 4.2 percent year-on-year in the March quarter of 2024, the highest in over a decade, surpassing long-term averages and historic norms.
– **Rents and Housing Costs Push Up the CPI**
Rents are rising sharply, reflecting a housing shortage, strong population growth, and sluggish construction activity. Owner occupier costs, especially the price of building a new home, are also contributing to headline inflation.
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**Recent Inflation Data and Its Implications**
Australian inflation is proving stickier than anticipated. For the March 2024 quarter, the Consumer Price Index (CPI) rose 1.0 percent quarter-on-quarter, with an annual increase of 3.6 percent. This was slightly above market expectations.
– **Trimmed Mean CPI**
The RBA’s preferred measure of underlying inflation, the trimmed mean, saw a quarterly rise of 1.0 percent and an annual increase of 4.1 percent, also above forecasts.
– **Services Lead the Upward Move**
Detailed breakdowns of the inflation data reveal higher prices in:
– Healthcare services
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