Economics update | 29 July 2022

28 Jul 2022

Inflation continues to soar
Inflation rose to 6.1 per cent in the year to June 2022, its highest level since June 2001 following the introduction of the GST.

ABS Consumer Price Index data released earlier this week show surging fuel prices (up 4.2 per cent in the June quarter) and the skyrocketing cost of new dwellings (up 5.6 per cent) were again the most significant contributors. After settling back in April following the initial shock after the Russian invasion of the Ukraine, fuel prices rose strongly again in May and June. Shortages of building supplies and labour, high freight costs and ongoing high levels of construction activity continued to contribute to accelerating price rises for newly built dwellings.

The price of goods (up 2.6 per cent in the June quarter) continued to rise more strongly than that of services (0.6 per cent). This was mainly due to increasing food prices (up 2 per cent), with vegetables (up 7.3 per cent) and fruit (up 3.7 per cent), as a result of the flooding events, labour shortages and rising freight costs. Notably, child care costs fell substantially (down 7.3 per cent) as the full effect of government child care subsidies introduced on March 7, flowed through into this quarter.

The inflationary pressure is not expected to ease soon, with the RBA and Treasury expecting inflation to continue to increase to around 7 per cent by the end of the year. Given this, we can expect (as most market economists are predicting, the RBA will increase the cash rate by a further 0.5 per cent when it meets next week.

The Treasurer’s Statement on the Economy
On Thursday, Treasurer Jim Chalmers delivered a statement on the economy to parliament.

The statement provides revised Treasury forecasts, highlighting the difficult circumstances the government faces, with high and rising inflation, falling wages and a trillion-dollar government debt.

Overall, Australia’s economy is outperforming the rest of the world. More Australians are in work than ever before. But high inflation, rising interest rates and falling real wages are undermining living standards.

Updated Treasury forecasts show:

Inflation to peak at 7¾ per cent by the end of the year, then settling back to 5½ per cent by mid-2023.
GDP growth of 3¾ per cent expected in 2021-22 and 3 per cent in 2022-23 (i.e. No recession on the horizon).
Unemployment to remain at its low of 3½ per cent in 2022, then edge up to 3¾ per cent by June 2023.
Wages growth upgraded to 3 ¾ per cent in both the 2022-23 and 2023-24 financial years.

The Final Budget Outcome for 2021-22, to be released in the next few weeks, is expected to show a dramatically better than expected result, due to higher revenue and delayed spending.

Going forward, the government’s economic plan aims to do three things to lift economic growth:

Help with the cost of living
Grow wages over time
Unclogging and untangling supply chains

No doubt we’ll hear more on the economic plan in the lead up to the October Budget.

Economics update | 29 July 2022

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Economics update | 29 July 2022

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