The Australian Bureau of Statistics will release quarterly inflation data on Wednesday. The headline figure could be the lowest in three and a half years.
Does that mean the cost-of-living crisis is over?
What’s expected for inflation?
The big four banks predict the consumer price index will land at an annual rate of 2.9% for the September quarter. That outcome would be the lowest since the March quarter of 2021 and well shy of its 7.8% peak at the end of 2022.
While technically within the Reserve Bank’s 2% to 3% target range, borrowers hanging out for an interest cut should restrain their hopes.
The RBA governor, Michele Bullock, has flagged the central bank is focused on underlying inflation, a gauge that excludes volatile price movers.
Government energy rebates alone will lop 0.4 percentage points off annual headline CPI, ANZ estimates. (Pundits hyping the IMF’s recent forecast of inflation rising to 3.6% by the end of 2025 overlook the likelihood that rebates will be extended in an election year.)
Still, the trimmed mean measure of most interest to the RBA should be 3.4% to 3.5%, the commercial bank economists say. If their predictions are accurate, underlying inflation will be at the lowest level since the end of 2021 – almost three years ago.
Why inflation isn’t the whole cost-of-living story
CPI is just one cost-of-living pointer. The ABS, indeed, has its own (less prominent) gauge.
In the June quarter, all household types had costs rising faster than CPI for the first time since 2010, the ABS said. It will release September quarter data on 6 November, a day after the RBA’s next board meeting (when the official cash rate will likely remain at 4.35%).
And while all of us will welcome slowing inflation, a better measure of how we’re faring is household disposable income, adjusted for inflation.
John Hawkins, a senior lecturer at the University of Canberra and formerly at Treasury and the RBA, said having per capita real income firmly on the rebound would be one sign the cost-of-living crisis is over. “We’re a long way off from that,” he says.
Hawkins notes consumer confidence is on the up – albeit from a low base – a sign the “crisis” is easing. The Westpac-Melbourne Institute monthly sentiment survey for October jumped 6.2% to the highest since the RBA started hiking its cash rate in May 2022.
“Consumers are no longer fearful that the RBA could take interest rates higher,” the institute said. “However, responses around family finances suggest progress on cost-of-living pressures – the main source of negative sentiment reads overall – is still slow.”
‘Crisis’ effects not evenly felt
Saul Eslake, an independent economist, suggests the “crisis” might be over once the RBA’s preferred inflation gauge returns to the target range mid-point of 2.5%.
On the central bank’s present forecasts – to be updated next month – the RBA doesn’t expect that to happen until about the end of 2026, Eslake notes.
For some households – particularly those who borrowed when interest rates hovered at record lows during Covid – the pain intensified when each of the 13 rate hikes occurred.
That group of about 1.5m households “will still feel pretty aggrieved for some time after the ‘crisis’ is officially declared ‘over’,” Eslake says. Renters, especially those on low incomes, have also been seriously squeezed as the price of essentials has risen and may not subside.
Those spared include pensioners, whose income is fully indexed for CPI. And for the roughly one-third of households who own their homes outright, higher interest rates have provided returns on deposits.
Savings, Eslake notes, have continued to climb to be about $500bn more than pre-Covid, according to Australian Prudential Regulation Authority data.
While the RBA estimates about 5% of households have incomes that fall short of essential expenses and scheduled mortgage repayments, many continue to pay off their debt in advance.
Spending back on a recovery track
Evidence that wages are rising faster than CPI and the economy is still generating many jobs will encourage many to think the crisis is at least abating.
The stage-three tax cuts – worth the equivalent to borrowers of two RBA rate cuts – have also started to flow.
Spending on discretionary items is holding up or increasing, Eslake notes, citing ABS data.
Rate cuts, when they eventually come (financial markets see less than a 50-50 chance of the first one by next February), will also encourage many to believe the worst is over, says Cherelle Murphy, EY’s chief economist for Oceania.
Housing, though, remains an ongoing source of angst for many. Interest rate cuts – to the extent they revive property price increases – may deepen dismay for those trying to buy.
“I don’t think they’re going to feel like the cost-of-living crisis is over,” she says
What could go wrong?
The range of positive indicators, though, mask a wider pessimism that seems hard to shake.
EY’s future consumer index, based on a survey this month that included about 1,000 Australians, suggests respite from cost-of-living strains remains “elusive and the pressure palpable”.
About 36% of respondents were “concerned about their jobs”, perhaps reflecting the RBA and Treasury’s forecasts that the jobless rate will edge higher over the next year. Financial worries, too, remain elevated.
Non-economic factors, from war in the Middle East to Russia’s invasion of Ukraine, are also adding to unease. (Extreme weather from the climate crisis won’t be helping either, nor would any political unrest after the US presidential elections on 5 November.)
“The level of concern over social and global cohesion is reflected in one in two consumers (51%) saying they are concerned about tensions and divisions in society, with a slightly higher proportion (60%) concerned about foreign conflicts and wars,” EY’s survey found.
Murphy says “it’s so much easier to find negatives … at the moment, than positives”.
“Having said all that, it’s not impossible that you will start to see a little bit more optimism [in Australia], particularly from those households that are not weighed down by housing and are not too worried about the jobs market. Those are kind of exceptions to the rule.
“We’re past the worst of it but we’re not yet in that ‘everything’s coming up roses’ era.”
