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It’s been a big week for economic and business news.
Treasurer Jim Chalmers handed down his third budget on Tuesday, and the Bureau of Statistics published wages growth data on Wednesday and the unemployment rate on Thursday.
While the forecasters were busy updating their spreadsheets, each of these data releases tell us something about Australia’s biggest economic problem: elevated inflation.
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And, of course, the more we know about inflation, the better handle we have on the direction of interest rates.
So, given all the information, where did we land?
As far as the 2023/24 federal budget is concerned, the treasurer says, when all fiscal measures are taken into account, inflation could fall to below 2 to 3 per cent by the end of this calendar year.
“Treasury is now forecasting inflation could return to [the RBA’s] target [band] earlier, perhaps even by the end of this year,” he said.
A key reason for this is the government’s announcement of more financial help for low-income renters and the $300 energy rebate.
Economists agree these measures will help lower headline – remember that word – inflation.
“And all of those – the way they’re delivered – and they take out straight from your utility bills or rent, that actually does lower that component of [headline] CPI,” RBC chief economist Su-Lin Ong said.
However, economists also say while headline inflation, or short-term price movements, will fall later this year, core or long-term trend inflation’s unlikely to budge and may even increase.
“If you are making something cheaper for households, it frees up their disposable income and allows them to spend in other areas, so it boosts income by more than would otherwise be the case and so that ultimately could add to demand and inflation,” Su-Lin Ong said.
Former Treasury economist Warren Hogan says the Reserve Bank, which wants inflation between 2 and 3 per cent, will ignore the price of goods or services that fall as a result of government budget measures or subsidies.
“[The RBA] will look through any subsidy.”
“They’re trying to work out what’s going on in the inflation process in this country.
“What they’re worried about is inflation getting stuck in the system and of course these sorts of subsidies actually only increase the chance of inflation getting stuck in the system which of course would completely rule-out rate cuts and might even increase the chance of a rate hike,” he said.
Concern a rise in rates is now more likely
This is where we landed on Wednesday morning – concerns the treasurer’s third budget had made an interest rate hike more likely.
Then came the ABS’s wage price index (WPI) data drop for the March quarter.
It showed, seasonally adjusted, the WPI rose 0.8 per cent this quarter and 4.1 per cent over the year.
Importantly, it came in below the December quarter figure of 4.2 per cent.
“The WPI rose 0.8 per cent last quarter, a bit lower than the 1 per cent market expectation, taking annual wage inflation down modestly to 4.1 per cent from 4.2 per cent,” BetaShares chief economist David Bassanese noted.
“Private sector wages grew 0.8 per cent, with annual private wage inflation also easing from 4.2 per cent to 4.1 per cent.
“Assuming a further gradual easing in labour market tightness, there’s a good chance that wage inflation has now peaked and could ease further over the coming year.”
While wages growth may have peaked, it wasn’t a low enough number to convince ANZ economists it would push the Reserve Bank to lower interest rates by the end of the year.
“We think today’s downside surprise is the preferred outcome for the RBA and confirms its view that wage growth has peaked,” the ANZ noted.
“But we don’t think that will be enough to shift the RBA’s thinking, and still see the cash rate on hold at 4.35 per cent until November.”
And, finally, the Bureau of Statics released its monthly unemployment report on Thursday.
It showed that full-time jobs fell by 6,100, while part-time roles increased by 44,600.
Recruiter and People2people managing director Erin Devlin says it highlights the reduced demand for workers.
“Candidates are getting a bit more nervous about getting the right role,” she said.
“They can see the pace of recruitment processes slowing.
“And that’s because there is more hesitation on the employer side on whether or not to hire on the permanent side.”
Investment bank JP Morgan put it more bluntly in a note to clients:
“Looking at the labour force flows data, the rise in unemployment mainly represented a fall in the probability of a worker moving from unemployment to employment.”
But this, economists say, ultimately lowers what they call “aggregate demand” in the economy, which is what the Reserve Bank wants to see.
“The Reserve Bank should really not even be talking about a [interest] rate hike at the next [board] meeting at a time when the unemployment rate is going up,” AMP deputy chief economist Diana Mousina said.
Crucial how extra money is spent
OK, so the federal budget appears to have put upwards pressure on “core” inflation, the wages or pay data looks to be neutral on inflation, while the unemployment rate looks to have eased concerns about inflation.
So, what does this tell us about the direction of interest rates?
One leading economist says the wild card is how millions of Australians spend the extra cash and savings they will receive from the federal budget
“It is not yet base case but, like the treasurer, I’ll be nervously awaiting what households decide to do with their extra cash over coming months,” David Bassanese said.
A recent NAB survey sent to thousand of its customers suggested as many as a third of taxpayers will save their stage 3 tax cut “windfall”.
Paying down debt, or deleveraging, does seem to be in vogue which would, all else being, ensure the Reserve Bank does not increase its cash rate target again in this cycle.
However, the financial markets are now leaning towards “pricing in”, or betting on, an interest rate cut before the end of this calendar year.
There is presently a 6 per cent chance of a 0.25 percentage point interest rate cut in August, and a 56 per cent chance in September.
By February, the chance of an interest rate cut rises to 90 per cent.
That means that after a huge week in business, finance, economics and politics, as far a mortgage-borrowers are concerned, we’ve largely gone full circle – back to expecting the start of interest rate relief within a year.
Of course if next month’s unemployment rate unexpectedly falls back below 4 per cent, and the RBA is deemed to “look through” Treasury’s headline inflation numbers and, instead, focus on “sticky” core inflation, we continue going around the circle.
It’s a fluid situation.
