Easing consumer spending to weigh on inflation data: Economists

Despite a slowdown from its 2022 peaks, inflation in Australia continues to remain above the central bank’s target range of 2–3 per cent, reaching 7 per cent in the March quarter.

However, the latest Consumer Price Index (CPI) data released by the Australian Bureau of Statistics (ABS) in June for the month of May, showed inflation had eased to 5.6 per cent, which played a role in the Reserve Bank of Australia’s (RBA) decision to hold the cash rate at 4.1 per cent in July.

As such, all of the major banks' economists expect today’s (26 July) CPI data for the June quarter will show signs of easing from the March quarter (7 per cent), but it may not be enough to keep interest rates on hold when the RBA meets next week 1 August.

NAB’s chief economist Alan Oster expects inflation will be around 4 per cent year on year by the end of 2023 and 3 per cent by the end of 2024.

However, this projection hinges on how goods disinflation is passed through and the continued build-up of domestic services pressures.

Mr Oster explained that goods price inflation had been moderating due to improved supply chains and this trend was expected to continue as global growth slows.

On the other hand, services inflation is expected to remain “sticky”, making progress on inflation gradual despite improvements on the goods side.

Given the extent to which prices will correct "remains uncertain", NAB maintains that the central bank will raise the cash rate to a peak of 4.6 per cent, further contributing to a slowdown in consumption during the second half of the year.

ANZ, however, expects headline inflation to ease to 6.2 per cent for the quarter, down from 7 per cent in the March quarter, maintaining its outlook that the RBA will hold the cash rate steady at 4.1 per cent.

"The RBA will likely take comfort that inflation appears to be falling in line with, or a touch faster than its May forecast," ANZ economist Brian Martin said.

Consumer sentiment and spending dip

Indeed inflationary pressures and rising rates were beginning to “bite” households, further lowering consumer sentiment, Westpac’s economist Matthew Hassan said.

The Westpac-Melbourne Institute Consumer Sentiment Index showed “very weak levels, declining 5.3 per cent to 81.3 over the three months to July, unwinding most of the gains seen over the previous three months”, he explained.

He added that, while sentiment “should post a solid gain once these pressures start to ease”, there had not been any definitive signs of cost pressures easing.

In fact, consumer expectations for inflation and wages growth have both lifted over the three months to July, suggesting inflationary pressures may take longer to subside.

However, as the inflation slowdown becomes clear domestically, “we should see a continued easing of inflation expectations, and that just makes it easier for the RBA to achieve a sustained returned to the 2–3 per cent target,” he said.

In addition, recent lending and consumer spending data indicated that consumers are cutting back on spending due to the rapid increase in interest rates, affecting household cash flows, which could potentially ease some inflationary pressures.

According to the latest Equifax Quarterly Consumer Credit Demand Index, mortgage applications fell in the second quarter of June 2023 (2Q23) by 2.8 per cent compared to the same period in June 2022. This coincided with CBA’s latest lending data for new consumer lending, which eased in June, with holiday lending falling to its lowest level since November 2022.

Another key factor to weigh on the central bank decision next week is the latest unemployment data from the Australian Bureau of Statistics, which revealed that the unemployment rate remained at a record low of 3.5 per cent, with almost 33,000 people gaining jobs in June.

While the low job rate comes as good news to jobseekers, the improved job security and spending are factors that could further fuel inflationary pressures.

[Related: Mortgage applications down amid financial hardship: Equifax]