Concerns mount over persistently high inflation: ANZ

The latest data from the ANZ-Roy Morgan Consumer Confidence Index, which surveyed 1,497 respondents, revealed a rise in consumer confidence by 2.5 points overall.

However, it also highlighted a significant increase in consumers’ expectations regarding inflation.

The data indicated that consumers’ weekly inflation expectations surged by 0.4 percentage points to reach 5.9 per cent, the highest level since mid-March.

While respondents may not know the exact inflation rate, their expectations regarding inflation over the next two years have risen, ANZ senior economist Adelaide Timbrell said.

This suggests that Australians anticipate a persistently high average inflation rate in the near future.

Looking ahead, consumer confidence in future financial conditions also weakened, reaching its lowest point since March 2020.

Among those most concerned about economic conditions were individuals paying off their homes, who displayed significantly lower confidence compared to renters and outright home owners, Ms Timbrell said.

This lack of consumer confidence among mortgagors coincides with the upcoming Reserve Bank of Australia (RBA) meeting in July, which economists predict will result in another interest rate hike, with a peak of 4.6 per cent anticipated.

Indeed, the RBA’s decision on interest rates will be influenced by the monthly consumer price index (CPI) for May today (28 June).

While the central bank has been lifting interest rates aggressively to scale back inflation, the inflation rate has remained persistently high.

The Australian Bureau of Statistics (ABS) reported that inflation fell to 7 per cent in the March quarter from its peak of 7.8 per cent in the previous quarter (4Q23), which is well above the central bank target range of 2–3 per cent.

Ms Timbrell explained that the combination of weakening productivity growth and stagnant wage growth has led to an “inflation problem”.

This is because the cost of production increases when productivity remains low.

She added that the issue extends beyond wages and includes factors such as business investment, technology, and process efficiency affecting unit labour costs.

“We need to see better productivity growth to get inflation back in the balance,” Ms Timbrell said.

“This is because it’s not that wage growth is going up too quickly, it’s that wage growth is not being offset sufficiently by increases in productivity.”

While boosting productivity growth is essential to restoring balance to inflation, Ms Timbrell noted that improving productivity growth is more challenging than reducing demand — a notable intention of the central bank.

She pointed out that while higher interest rates may cause temporary economic pain for some, inflation affects everyone.

“We also have to remember inflation hurts every single person whereas higher interest rates only temporarily create economic pain for some,” Ms Timbrell said.

“If households were at a widespread risk of having financial stability issues, the Reserve Bank may need to cut earlier.”

However, given mortgage arrear rates remained very low, she expects another hike.

“Many people with home loans also have excess savings buffers and this reduces the average household risk of coming into financial stress,” Ms Timbrell said.

[Related: Inflation falls from 30 year high]