Cash Rate Update

It has been a hard slog to get inflation down but it looks like we are getting very close. It is hard to believe that it was only two years ago that it was widely expected that after a brief inflation blip upwards, rates would remain on hold until 2024. Now 12 rate rises later, inflation is still above the two to three per cent band. It is coming down but may not be fast enough for one or two more increases.

There are some promising signs. Domestic travel, electricity and fuel costs fell over the June quarter. The rapid increases in construction costs are nearing an end as demand softens and the cost of materials falls. International travel increases were high but are expected to come back as it was primarily driven by Australians heading to a European summer. Even potato price rises are expected to start to moderate as weather conditions for this crop improve. In the June quarter, inflation rose by 0.8 per cent, the lowest level in almost two years.

Overseas are also seeing some promising signs. US inflation came in at three per cent last month, close to the two per cent target set by that country’s central bank. It didn’t stop them raising rates last week but like Australia, it is expected that the increases will soon be over. Even in countries that have been very aggressive with rate rises, increases seem to be coming to an end. New Zealand’s rates have risen far more quickly than Australia, even forcing that country into recession, but the RBNZ has now flagged that they are just about done.

The big problem remains rental increases. As we noted last year when advertised rents started to skyrocket, there is always a lag between advertised rents climbing and an increase in rents in already tenanted properties. It is the rents in tenanted properties that is used in the ABS inflation numbers. Increases in advertised rents are starting to slow but it will be some time before this slows down in the rental calculation used in the inflation numbers.