MNI: Budget To Add Inflationary Pressure, Stay RBA's Hand
The government's assertion that extra spending will decrease inflation is false, former RBA and government economists tell MNI.
Measures to support households within Australia’s 2024-25 federal budget could lower headline inflation in the short term but also sustain underlying inflation and delay Reserve Bank of Australia rate cuts into next year, former staff have told MNI.
The front-loading of spending gives the budget an inflationary bias despite government claims that its measures to contain the cost of living will have the opposite effect, noted Mark Wooden, professorial fellow at the Melbourne Institute at the University of Melbourne and former Fair Work Commission Annual Wage Review panel member.
“That doesn't mean inflation rates will rise, but it does mean CPI will be higher than it might otherwise have been with a different budget,” he added. “Inflation has been coming off slowly and this may make it harder to get that inflation rate down towards the target range.”
The Labor government delivered its third budget Tuesday evening, revealing cost-of-living payments such as a AUD300 energy rebate paid as a credit to each household. Australia is heading for a fiscal deficit of AUD28.3 billion in 2024/25, after an expected 9.3 billion surplus in the preceding financial year.
Sean Langcake, head of macroeconomic forecasting at BIS Oxford Economics and a former RBA economist, noted the budget's stimulus is largely untargeted. The measures may lower CPI mechanically this year, but inflation will rise once subsidies roll off, he added.
"I don't think it will spur [the RBA] to act, but it might prolong inaction," he explained, noting the Q1 inflation print had tested the Reserve's resolve. (See MNI RBA WATCH: Hikes Discussed, Governor Defends Credibility)
"The RBA is well versed on how to look through this type of impact on inflation. Some will be more concerned about the stimulatory nature of tax cuts and on targeted utility subsidies, which essentially pull in the opposite direction."
He said any decision to shift rates higher will be driven by non-tradable inflation continuing to surprise to the upside. "This budget probably means that we pencil in the first rate cut coming a quarter or two later than we otherwise would have."
INFLATION EXPECTATIONS
Nonetheless, lower headline inflation might flow through to lower expectations, noted Tim Robinson, senior research fellow at the Melbourne Institute of Applied Economic and Social Research at the University of Melbourne and former RBA economist.
“That could be one channel through which underlying inflation is affected,” he said.
The Treasury had modelled inflation returning to target by December in contrast to the RBA’s late-2025 prediction, alongside a slide in the iron ore price to USD60 a tonne by March next year, a far cry from the near USD120 a tonne at which the commodity has traded this year.
Robinson noted the Treasury used conservative commodity price assumptions. “Both the RBA and Treasury also use a constant exchange rate assumption, because of how difficult it is to forecast,” he said. “That said, if the spot price of iron ore did fall to USD60 the exchange rate may well depreciate, which would lift import prices and eventually inflation.”
WAGES INDEX
Wooden noted the RBA will closely watch the recent Wage Price Index result, which rose 0.8% in the March quarter, 10 basis points lower than expected, and how it could impact the upcoming Fair Work Commission's minimum wage decision.
"I think the minimum wage outcome will likely be something with a four in front of it," he added, noting the government did not want to see wage growth go backwards in real terms.
The commission typically decides on the minimum wage in June. Its 2023 decision elevated rate hike concerns.