Why Aussies should be worried about a SECOND inflation shock – and it would kill off the chance of an interest rate cut as more people work extra jobs to pay bills
A second inflation shock is shaping up as a real possibility that could deprive Australian home borrowers of a much-needed interest rate cut next year, an economist fears.
More Australians are already working two or more jobs to cope with the cost of living crisis that has seen a surge in rents and mortgage repayments.
But the interbank futures market thinks the Reserve Bank of Australia is finished with the rate rises, after 12 hikes since May 2022 took the cash rate to an 11-year high of 4.1 per cent.
The betting market on interest rates is expecting a rate cut in late 2024, which would be the first relief from the most aggressive rate increases since 1989.
A moderation in inflation in the first half of 2023, from 32-year high levels at the end of 2022, has convinced financial markets the worst is over.
But a closer look at monthly inflation data for July showed a surge in rents and electricity prices, which means market predictions may be premature.
AMP deputy chief economist Diana Mousina said rising prices for some services suggested Australians could be in for a nasty surprise by early next year.
‘While it may seem like the fight against inflation has been won by central banks, some recent leading indicators of inflation have ticked up again which could indicate that inflation may have a resurgence in late 2023/early 2024 which could take financial markets by surprise,’ she said.
The Reserve Bank’s outgoing governor Philip Lowe has unleased on his critics and the media – claiming five myths were circulating about him that were untrue.
Another inflation shock would be bad news for Australians struggling to pay their bills, with new official data showing a seven per cent annual increase in the number of people working multiple jobs.
The Australian Bureau of Statistics has revealed 959,000 people worked two more jobs in the June quarter.
They make up 6.8 per cent of the 14million people in work.
Women working as nurses were most likely to be juggling two jobs with 124,100 of them in this position.
A recent drop in fruit and vegetable prices, following a flood-related spike last year, could also be undone as a return to El Nino weather patterns and drought conditions sparked bushfires that disrupted harvests and food transport.
‘Extreme weather events can cause disruptions to food production and supply leading to volatility in food prices,’ Ms Mousina said.
‘While central banks usually look through spikes in prices, the events of the past few years have shown that temporary price changes can seep into numerous components of the supply chain.’
Inflation in July moderated to 4.9 per cent, the lowest since February 2022, and down from 5.4 per cent in June, based on the Australian Bureau of Statistics’ monthly measure.
The consumer price index has retreated from a 32-year high of 8.4 per cent reached at the end of 2022, with the Reserve Bank expecting inflation to return to the top of its two to three per cent target by mid-2025.
Before Covid, inflation very rarely even rose above two per cent from 2014 to late 2019.
It climbed above the three per cent mark in 2021 for the first time in a decade, as global lockdowns exacerbated supply chain pressures.
Ms Mousina said inflation would be unlikely to return to pre-Covid levels.
‘In the medium-long term, inflation is likely to be higher compared to its low average in the decade prior to Covid,’ she said.
A move away from Chinese supply chains and a related increase in defence spending was expected to keep consumer prices high.
‘The reversal of globalisation towards onshoring/friend shoring, bigger governments and more intervention in sectors, an increase in government defence spending leading to bigger budgets, a decrease in the working age population and an increase in the dependency ratio and the impacts of climate change,’ Ms Mousina said.
Businesses are struggling with higher interest rates with the ABS on Friday also revealing that turnover fell in seven out of 13 industries in July, including electricity, gas and water, and mining from lower commodity prices.
Transport and warehousing, information technology and media, manufacturing and arts and recreational services also shrunk.
The Reserve Bank is expecting the jobless rate to rise from 3.7 per cent in July to 4.5 per cent by December 2024 to get inflation under control.
This would see the number of unemployed Australians rise to 654,858, up from 523,500 now which would mean another 131,358 people losing their job.
ELECTRICITY: Up 15.7 per cent
GAS: Up 13.9 per cent
DAIRY PRODUCTS: Up 12.7 per cent
BREAD, CEREAL: Up 9.9 per cent
INSURANCE, FINANCIAL SERVICES: Up 8.5 per cent
RENT: Up 7.6 per cent
HOLIDAY TRAVEL, ACCOMMODATION: Up 5.3 per cent
EDUCATION: Up 5.2 per cent
HEALTH: Up 5.2 per cent
ALCOHOL: Up 5 per cent
MEAT, SEAFOOD: Up 2.4 per cent
PETROL: Down 7.6 per cent
FRUIT, VEGETABLES: Down 5.4 per cent