Since inflation first broke above the RBA’s 2-3 per cent target range in June of 2021 for the first time in a decade, things have only gotten ever more challenging for Australian households.
At first, the inflation issue was not seen as all that serious, with the RBA joining the global chorus claiming that it was “only transitory” and that “a period of contractionary monetary policy will not be required to return inflation to target”.
In plain English, the RBA believed that inflation would swiftly fade and that no interest rate rises would be required to tame it. And this was less than six months away from Governor Philip Lowe pulling the trigger on the first interest rate rise in over a decade.
Unfortunately, the RBA was wrong.
Since peaking in the June quarter of 2020, the inflation-adjusted pay packets of wage earners have fallen by 8.2 per cent, the largest fall since at least 1997 when the ABS introduced its wage price index.
And from July 1, yet another challenge will be added for millions of Aussie households, with electricity prices set to rise by up to 25 per cent in New South Wales, southeast Queensland, South Australia and Victoria.
In May, the Australian Energy Regulator (AER) confirmed that energy prices would rise by 19.6 per cent and 23.9 per cent in NSW, SA and southeast Queensland.
The Victorian Essential Services Commission followed suit, confirming that electricity bills would rise by an average of 25.1 per cent and by as much as 27.2 per cent depending on the energy provider.
This is just the latest outsized increase in non-discretionary costs impacting household budgets. For well over a year, inflation in non-discretionary items such as food, fuel, household energy, health and housing have consistently had larger price increases than other items that are not considered essential.
While impacting all households with differing degrees of severity, this has added to the challenges faced by low-income households, pensioners, the disabled and those on other forms of government support payments in particular.
The significantly higher than CPI increase in electricity costs and the high probability of it driving further inflationary pressures is likely to put additional pressure on the RBA to raise interest rates when they meet on Tuesday.
As things currently sit, the market is pricing in a 28 per cent chance of a further 0.25 per cent increase to a cash rate of 4.35 per cent. Despite the market pricing in such a low probability of the RBA pulling the trigger on the 13th rate rise of the current cycle, NAB, ANZ and Westpac have all predicted that the RBA will raise rates on Tuesday.
Despite the market pricing in an extremely low chance of a rate rise and a relatively broad consensus against a hike, the RBA surprised by delivering a shock rate rise in May after pausing in April.
In the lead up to Tuesday’s rate decision, uncertainty is once again the order of the day, as analysts and economists attempt to understand how the RBA is weighting all the various factors and developments in economic data since their last meeting.
The large increase in electricity prices is going to put additional pressure on the RBA for quite some time to come. As things currently stand, gas and other household fuels are up by 26.2 per cent over the past 12 months of data. With electricity set to rise by 20-25 per cent for most Australians, the electricity component of the CPI basket is set to march even higher.
While the Albanese government’s energy subsidy will blunt this increase for a time, eventually when its impact feeds out of the CPI calculation, the increase in the electricity CPI component will likely spike once more.
There is also further baked in inflationary pressures that the RBA will be forced to confront, not just in the coming quarters, but in the coming years.
Currently the CPI reports that rents have risen by 6.3 per cent over the last 12 months. This is far below the peak increases seen in asking rents by private providers. In a recent appearance before the Senate Estimates Committee, RBA Governor Philip Lowe reported that the RBA believed that the rental component of the CPI would hit around 10 per cent.
Governor Lowe went on to state that “rent growth is going to stay high for a long time”.
This 10 per cent increase in rents predicted by the RBA is significantly below the increases seen in capital city asking rents recorded by private providers. CoreLogic has seen asking rents rise by 11.8 per cent and SQM Research 18.6 per cent.
Between the increase in household energy costs and the baked in increase in rents, these two factors could contribute to up to 1.38 to 1.87 percentage points of inflation depending on whether the RBA, CoreLogic or SQM Research’s rental inflation scenario ends up being the most correct.
At the low end, that is 69 per cent of the RBA’s 2 per cent inflation floor target taken up by CPI components that total less than 9 per cent of the overall CPI basket.
The rise in electricity prices marks just the latest development in an environment defined by challenges and uncertainty for many Australian households.
And ultimately, the path of future interest rates and the fight against inflation are in the hands of the RBA who may be getting a new leader as soon as September.
Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator