After successfully touching down from high inflation with a soft landing, Australia is at risk of overshooting the runway.
Headline monthly inflation has held within the Reserve Bank of Australia’s two to three per cent target band since August, while unemployment has stayed at historically low levels.
It’s an outcome seldom achieved in Australia’s history or among peer economies, as Treasurer Jim Chalmers pointed out in comments heralding the nation’s “soft landing” following the RBA’s cash rate cut last week.
Further progress on inflation is expected when the Australian Bureau of Statistics releases consumer price index figures for April on Wednesday.
Westpac chief economist Luci Ellis predicts the inflation rate will fall through the floor of the central bank’s target range to 1.9 per cent, from 2.4 per cent in March.
The former RBA chief economist forecasts prices rose at 0.3 per cent over the month, with disinflation continuing to show through in goods such as clothing and footwear, dwelling maintenance and furniture.
The RBA sets a minimum target for inflation because if prices grow too slowly, it could cause consumers to delay purchases. Businesses could respond to lower spending and higher real wage bills by laying off workers, resulting in a negative spiral of demand and prices.
Reserve Bank governor Michele Bullock won’t be too concerned by the measure undershooting. The bank takes greater stock in the less volatile quarterly trimmed mean, which it predicts to stay around the midpoint of its target range for the foreseeable future.
Ms Bullock retired another analogy – that of the “narrow path” the bank has had to walk – in her May 20 press conference following the board meeting.
Her focus turns to combating uncertainty caused by US President Donald Trump’s tariffs, with the RBA expecting the trade war to have a disinflationary impact on Australia, Ms Ellis said.
The board will have to wait for the second and third monthly readings of the quarter to get data on services inflation, which will show if low unemployment is flowing through to higher labour costs for businesses.
“One area that the RBA had previously pointed to as a reason for not being confident that inflation can be sustained at current levels is the tightness of the labour market,” Ms Ellis said.
“While it still highlighted indicators that suggested remaining tightness, the forecasts for unemployment have been lifted slightly, while those for employment and wages growth have been reduced slightly.”
Westpac’s prediction was on the lower end of market estimates, with the consensus forecast for annual CPI to come in around 2.3 per cent.
That’s the figure volunteered by AMP economists, while JP Morgan economists Ben Jarman, Tom Kennedy and Jack Stinson expect a reading of two per cent, which would still be the softest inflation outcome since March 2021.
“Electricity subsidies will once again loom large with the fourth instalment of the Commonwealth government’s energy bill relief fund to lower household out-of-pocket electricity costs,” they said.
“In net terms we expect electricity prices to tick lower in April. Across the remainder of the basket, we expect modest gains in the food, clothing and health sub-groups, while transport, communications and furnishing are all forecast to impart modest drags.”
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