Government has a ‘role to play’ in curbing inflation: AMP

While inflation has cooled to 5.6 per cent in May, down from 6.9 per cent in April, according to the Australian Bureau of Statistics (ABS), it remains well above the Reserve Bank of Australia’s (RBA) target range of 2–3 per cent, despite a 4 per cent increase to the cash rate in just over 12 months.

According to AMP economist Diana Mousina, increasing the cash rate is a “blunt tool” because it places a heavier burden on mortgage holders.

In analysing data from the ABS between 2019 and 2020, Ms Mousina said that 37 per cent of Australian households have a mortgage and they spend nearly 16 per cent of their gross household income on housing costs.

In contrast, home owners without a mortgage spend only 3 per cent of their income on housing while renters allocate approximately 20 per cent of their income to housing.

“The high level of household debt now means that mortgage holders will bear the brunt of monetary policy changes,” Ms Mousina said.

While the RBA’s primary responsibility is to combat inflation, she emphasises the need for government support in addressing the issue.

However, government policy tools are often “slow-moving” and have less direct impact on inflation.

Drawing on international examples, Ms Mousina mentioned recent attempts in Europe to implement price caps on essential items such as food.

While these caps led to a decrease in measured inflation, they also resulted in reports of food shortages.

Economists generally do not advocate price controls or caps due to their distortionary effects on the market and potential supply constraints.

However, the government announced late last year the move to cap gas prices at $12 per gigajoule to limit energy price rises to alleviate the burden on households, thus it has been used in some capacity.

Treasurer Jim Chalmers has acknowledged the high cost of living for many Australians, suggesting the increases we’re in electricity costs are “much smaller than they would otherwise be if the government hadn’t taken decisive action” by implementing the price caps.

In addition, the government has announced a National Energy Bill Relief, where eligible low-income households, pensioners, self-funded retirees, families, and carers will receive up to $500 bill relief payment towards their electricity bills in the 2023–24 financial year, which differs across jurisdictions and may go against efforts to ease inflation.

Ms Mousina suggests several critical measures to address the inflationary challenge, including ensuring a well-regulated electricity market, sustainable wage outcomes, appropriate fiscal policies, adequate competition in the retail sector, and sufficient housing supply to meet migration targets.

“The good news is that inflation is expected to decline through the rest of the year which should mean that central banks are close to the top of their tightening cycles,” she said.

Household spending

Meanwhile, despite the overall decrease in spending observed in the March quarter, the latest retail spending data from the ABS revealed a surprising increase in sales in May 2023, surpassing economists’ expectations.

Ms Mousina noted that economists had predicted a mere 0.1 per cent growth.

The ABS data further highlighted that this surge in spending was primarily driven by a 2.2 per cent increase in “other” retailing, encompassing sectors such as newspaper and books retailing, recreational goods, pharmaceutical and cosmetics, and other specialty retailers.

Additionally, there was a 1.4 per cent rise in spending on eating out, indicating a renewed interest in dining experiences.

This unexpected growth in retail spending suggests that despite the challenges posed by inflation and housing costs, consumers are still willing to engage in discretionary spending, particularly in certain retail sectors and the dining industry.

This coincides with NAB’s Online Retail Sales Index, monthly update for May 2023, which found all categories, except media, recorded growth in the month, with a particularly strong rebound in homewares and appliances, along with fashion, and department stores.

The bank also revealed, upon reaching out to 570,000 customers through a ‘check-in’ program, customers remain resilient and broadly in good shape despite cost-of-living concerns.

However, it identified around 8,500 home loan customers who may require additional support.

[Related: Inflation falls but it is enough to hold rates: Economists ask]