Higher inflation for items that interest rates have little control over, such as education, healthcare and insurance, will force the Reserve Bank of Australia to consider squashing harder on the prices of other items to achieve an inflation rate averaging 2.5 per cent.
Research by ANZ shows that goods and services which have their price increases linked to the previous higher inflation rates and are often administered by governments, have recorded larger price rises since late last year.
Analysis by ANZ senior economist Blair Chapman shows government-administered prices have risen 4pc.
This includes tertiary education fees (up 7 per cent), secondary education (6.1 per cent), tobacco (11.3 per cent), water and sewerage (5.7 per cent), medical services (4.5 per cent) and postal services (15.4 per cent) in the year ending March 31.
Insurance inflation has jumped 16.4 per cent, reflecting premium increases after natural disasters.
RBA deputy poses a big question
RBA critics have argued there is no point the central bank lifting the 4.35 per cent cash rate in response to persistent inflation for goods and services that monetary policy has little direct influence over.
RBA deputy governor Andrew Hauser last month raised the spectre of whether the central bank should strip out the price rises for government-administered items and focus more on things the RBA can control, or “do you have to push the rest of the inflation basket down a little bit further in order to bring inflation back to target?”
The issue will be a key consideration for the RBA board after the consumer price index (CPI) for the June quarter is published on Wednesday.
Market economists expect the annual headline CPI to have accelerated from 3.6 per cent to 3.8 per cent to the end of June.
The RBA’s preferred measure of underlying inflation, trimmed mean CPI, which strips out the most volatile price items, is tipped to remain stuck at 4 per cent, according to the average forecast of leading market economists.
Analysis by ANZ senior economist Blair Chapman shows that inflation-indexed prices rose 6.5 per cent in annualised terms over the six months to March 31. Government-administered prices rose 4 per cent.
In contrast, non-administered and non-indexed inflation over the same two quarters was 2.4 per cent in annualised terms.
“Non-administered and non-indexed inflation has declined notably and is running around levels consistent with the RBA’s target band on a six-month annualised basis,” he said.
“The RBA can do little to influence inflation on indexed or administered goods and services without long lags.”
University fees were indexed to December 2022 price rises, when overall inflation was more than 7 per cent.
“The RBA could raise the cash rate to slow inflation more sharply across the rest of the CPI basket, offsetting higher administered and indexed inflation, and bringing headline inflation back into the target band sooner,” Mr Chapman said.
“But this would likely slow activity in interest rate-sensitive sectors, slow employment growth and add to unemployment.
“In response to deputy governor Hauser’s question, we think the RBA will look through some of the inflation it can’t control even if the Q2 CPI prints a little above the RBA’s forecasts, and see the board holding the cash rate steady at 4.35 per cent at its August meeting.”
Demand running too high
However, Judo Bank economic adviser Warren Hogan said the RBA must focus on price stability across the economy. Stubborn inflation was being driven by demand exceeding the ability of the economy to supply goods and services in a sustainable, low inflation way, he said.
Economic activity was too strong to get inflation back to the midpoint of the RBA’s 2-3 per cent target.
“The June employment numbers confirm 250,000 of net new jobs over the first half of 2024, and the post July 1 weekly consumer confidence number from ANZ-Roy Morgan points to a positive consumer response to tax cuts and cost-of-living support,” Mr Hogan said.
“It all continues to point to a significant excess demand in the economy. Excess demand now points to inflation picking up into 2025.
“The policy decision is less about inflation being sticky and more about rising inflation pressure from excess demand.”
RBA governor Michele Bullock has said tighter monetary policy helps reduce consumer demand for goods and services, therefore making businesses less willing to pass on cost increases to customers.
Mr Hogan forecasts the RBA’s preferred measure of underlying inflation to print at 4.1 per cent in annual terms – above the RBA’s 3.8 per cent forecast.
“If our expectations are met and we see core inflation of 1.1 per cent in June and clearly exhibiting an upward trend in 2024, there are two policy implications – the RBA needs to go back-to-back [with interest rate increases] in August and September, and they should probably consider a 40 basis point hike in August.
“It is becoming increasingly clear that the cash rate needs to be up around 5 per cent, or even higher.”
Ahead of the inflation release on Wednesday and RBA board meeting next week, Prime Minister Anthony Albanese said the two Labor budget surpluses had helped reduce inflation pressure.
“The RBA has acknowledged that’s the case,” he told Sky News.
Mr Albanese noted the inflation rate had roughly halved since 2022. “We want to see further moderation occur, and we will continue to prioritise cost-of-living relief.”