Reasons why inflation is high and an interest rate cut is off the table for the RBA

Last week’s 3.2 per cent headline consumer price index figure came in hotter than expected, ending hopes of rate relief on Tuesday.

More troubling for homeowners, the Reserve Bank’s preferred “trimmed mean” measure, which strips out the most volatile price moves, jumped 1 percentage point in the September quarter to 3 per cent annually. That is stubbornly sitting outside the RBA’s 2-3 per cent target band and prompted some forecasters to suggest the next move could actually be upwards.

Digging deeper into the inflation data shows fast-rising costs include electricity, education and council rates.

 

KPMG chief economist Brendan Rynne said electricity’s 9 per cent quarterly and 23.6 per cent annual jump was driven by a “double effect” of annual price rises on July 1 and the reduction or removal of federal and some states’ electricity bill subsidies.

“It’s the unwinding of the energy rebates,” he said.

“The September quarter of 2024 had state government electricity rebates for Queensland, Western Australia and Tasmania, but there’s no rebates for the (latest September) quarter.”

Other big annual price increases were eggs, affected by bird flu outbreaks and rising demand, and tobacco, which Dr Rynne said reflected high government taxes.

“The government has taxed tobacco at extreme levels to reduce consumption because of its negative health effects … people are suggesting they have overtaxed it, and it’s pushed the people who are still looking for it into illegal tobacco,” he said.

Over the past five years tobacco prices have surged more than 55 per cent, higher than any other CPI component.

The new figures also show the price of domestic travel rose 5.2 per cent annually, and is up 31.5 per cent in the past five years.

RSM Australia economist Devika Shivadekar said spending on travel had been strong during the school holidays.

“The earlier rate cuts appear to be filtering through, boosting consumer confidence and encouraging spending,” she said.

AMP deputy chief economist Diana Mousina said Australia’s inflation “problem” was partly driven by high price growth in items with a high degree of government intervention – such as education, health and utilities.

Economists have criticised the government for high levels of spending and the failure of its energy policy to keep a lid on electricity prices.

BetaShares chief economist David Bassanese said “our energy policy failures are all the more damning given our abundance of energy resources – coal, gas, wind and sunshine”.

Treasurer Jim Chalmers was interrogated by the opposition in parliament last week over the “Jimflation effect”, but he hit back with a reminder that Labor inherited inflation at “6.1 per cent and rising fast” when it took office in 2022.

Rabobank said in a research note that “there is now a substantial risk that the cutting cycle might be over completely”, while CreditorWatch chief economist Ivan Colhoun said it was “goodbye pre-Christmas rate cut”.

KPMG’s Dr Rynne said he expected the RBA cash rate to fall in the future because there was still economic weakness in Australia that needed support from lower interest rates.

“I think it’s going to start revealing itself through weaker employment growth,” Dr Rynne said.

However, this was unlikely to happen on Melbourne Cup Day, he said. “Even though I think they should because of the weakness there, the optics are now much too difficult for them to do it.”

This article first appeared in The Australian as Reasons why inflation is high and an interest rate cut is off the table