Inflation is beginning to ease as prices fall from pandemic highs.
However, soaring utility bills, rents and rising healthcare costs continue to squeeze family budgets.
Annual inflation was 7 per cent over the March quarter, down from 7.8 per cent in December, Australian Bureau of Statistics (ABS) figures published on Wednesday show.
The price of clothing, footwear, furniture, household appliances and petrol fell in the period, the ABS revealed.
Economists said inflation is still far higher than the Reserve Bank is comfortable with, amid surging utility bills, rents and essential services costs such as health care and education.
“Inflation has peaked and is on the way down,” economist Saul Eslake, said of the ABS figures.
“But there are still some significant inflationary pressures out there.”
Retailers begin discounting
The slight decrease in inflation during the March quarter was expected, following a reduction in global supply chain disruptions that pushed up prices for key retail goods during COVID-19.
That trend was evident in significant price falls across key retail categories, with the ABS saying retailers are now discounting in greater numbers, which is also a sign demand is slowing.
Goods inflation fell from 9.5 per cent last December to 7.6 per cent in March, ABS data shows.
Big drops in household goods prices drove that decrease, with furniture and furnishings (- 3.5 per cent); and appliances (-2.19 per cent) falling as retailers began post-Christmas discounts.
Garments (-3.2 per cent) and footwear (-5 per cent) prices also fell markedly over the quarter.
Grocery prices rose in the March quarter, but at a slower pace than late last year, with annual food inflation now 8 per cent compared to 9.2 per cent last December.
ANZ senior economist Adelaide Timbrell said the easing in goods inflation is a global story, with pressures on international supply chains that emerged during COVID-19 now fading.
“Global pressures on inflation seem to be easing quickly,” Ms Timbrell said on Wednesday.
“Tradables inflation plummeted to 0.3 per cent q/q (quarterly) from 1.5 per cent in Q4 (December) and is now just 0.1 percentage points above the average for 2014-19.”
Essential services squeeze
However, while easing goods prices is positive news for household budgets, inflation is still far too high because services prices rose at the fastest pace since 2001 over the March quarter.
And the bad news is that the biggest price spikes are all for essentials like housing and energy.
Utility bills continue to be a pain point, despite federal government efforts to keep a lid on rising costs, with electricity (up 15.5 per cent annually) and gas (up 26.2 per cent) leading the way.
Rents posted their largest quarterly rise since 2010 amid low vacancy rates and resurgent population growth, with Sydney (up 4.8 per cent) and Melbourne (up 3.1 per cent) leading the country.
Healthcare costs shot up after annual reviews of insurance premiums, leading to a 4.2 per cent rise in the price of medical and hospital services and a 4.5 per cent jump in drug prices.
Rising services inflation was also evident in discretionary categories, with local holiday travel and accommodation prices rising another 4.7 per cent after strong demand over Christmas.
BIS Oxford head of macroeconomic forecasting Sean Langcake said rising services prices will worry the RBA, which is fearful that rising labour costs will entrench higher inflation in 2023.
“We know wage growth is increasing and in many ways that’s no bad thing, but it’s problematic for the RBA if they’re intent on seeing inflation come back down,” Mr Langcake said.
May interest rates call
Amid disagreement among experts about whether the RBA will pause rates again when it meets next week, Mr Langcake said the May mortgage bill decision will be a “close call” for central bankers.
But if the RBA does decide to hold rates again in May, then it’s unlikely more hikes are to come.
“If they don’t hike after these inflation numbers then it’s very clear they think they’ve done enough and are happy to sit on their hands and wait it out,” Mr Langcake said.
“These data are roughly in line with their expectations.”
Mr Eslake thinks the RBA is likely to hold rates again in May and will communicate that while inflation has now peaked, price growth remains much higher than its 2 to 3 per cent target band.
“The longer that [holding] goes on, the more likely it is you can conclude that the rate hiking cycle is over,” he said.
The Commonwealth Bank has taken a different view, with chief economist Gareth Aird maintaining his forecast that the RBA will pass through one more 0.25 percentage point increase in May before ending the cycle.
“The RBA has a hiking bias,” he said in a research note on Wednesday.
