Inflation drops to 6%
This week’s big economic news was the release of the June quarterly and monthly inflation results.
The quarterly results have been largely considered an inflection point where the Reserve Bank of Australia (RBA) would keep raising interest rates if inflation did not drop significantly. Alternatively, if inflation were down, the RBA might put the cash rate on hold because inflation was trending in the right direction. For the approximately 40% of households with a mortgage and the property investors that contribute 30% of the housing market, who have a mortgage, these interest rate rises have been having a massive impact on household budgets and consumption, precisely what the RBA was aiming for.
Before we begin, it is important to understand what these inflation numbers represent. The June quarterly inflation figures compare the prices averaged over April, May and June in 2022 with the average prices in April, May and June in 2023. The June monthly inflation figures compare the prices averaged over June 2022 with the average prices in June 2023.
Fortunately, the quarterly inflation decreased from 7.0% in March to 6.0% this quarter, below the widely forecast 6.2%. This means that the price increases between the June quarter of 2022 and the June quarter of 2023 are less than those between the March quarter of 2022 and the March quarter of 2023. As our “Australian Quarterly Annual Inflation Rate” chart below illustrates, the quarterly annual inflation is trending down.
The June monthly annual inflation of 5.4% was also down compared to the May figure of 5.6% and April’s 6.8%. So while the June quarter was 6.0%, we can see inflation falling over those three months. The following chart illustrates the downward trend in monthly inflation, and we can, in all likelihood, expect this trend to continue for monthly and quarterly inflation.
The sudden jump in the ASX 200 stock market index when the inflation data was announced would indicate that the market believes the drop in inflation is enough for the RBA to leave rates on hold. However, as both charts reveal, monthly and quarterly inflation is still far above the RBA’s target range of 2-3%. Furthermore, we have written before that we believe the RBA is also looking for unemployment to reach approximately 4.5% before further interest rate rises are entirely off the table because wage growth fueled by strong employment will continue to feed inflation.
The “Inflation and Unemployment” chart below shows that the gap between inflation and unemployment continues to close, which will take some pressure off the RBA to raise rates. The question is whether inflation is falling fast enough while unemployment remains so low that the RBA is prepared to leave the cash rate on hold. We think the RBA will leave rates on hold next week at this stage, but the pause may only be temporary.
Despite all the talk about inflation and possible interest rate movements, Perth property prices have continued to increase again this week, recording approximately a 0.25% rise, and as the following chart illustrates, values are up more than 3.6% for the year. After an initial drop in the first three months of 2023, prices have consistently increased since the beginning of April.
As the following chart reveals, if the current price growth trend since April this year continues, Perth will have experienced a nearly 9% increase. At the beginning of the year, REIWA provided a very optimistic forecast for property prices compared to Australia’s major financial lenders, predicting a rise of 2-5% (we used the midpoint of 3.5%). The major lenders all predicted negative price growth, so kudos to REIWA. However, if the current trend since April continues, which is likely if interest rates are on hold, then as the following chart suggests, prices will have increase by 9% come the end of the year.