Analysis: Factors influencing Australian inflation
In this Weekly, we look at some of the key risks around the Australian inflation outlook in the context of measured inflation turning higher globally. Surveyed measures of retail prices in the NAB Business Survey are pointing to a lift in prices that has so far not materialised in the CPI. There are also a range of policy impacts that are impacting and acting to restrain measured inflation such as the HomeBuilder subsidy and tourism and hospitality vouchers. These factors will continue to complicate a read of underlying inflation pressures until mid-2022, but importantly the risks to CPI are tilting higher.
The HomeBuilder subsidy has been a key factor restraining measured inflation in Australia. The HomeBuilder subsidy is treated as an effective price discount from the point of view of consumers and has largely offset higher construction costs (which in part has been driven by the subsidy). The peak flow of the subsidy is likely to have occurred in Q2 2022, meaning that a slower flow of grants should start to add to quarterly CPI. The total unwind of the subsidy impact on prices is only expected to be gradual. If construction prices are otherwise unchanged, it would add around 0.35ppt to CPI over 5 quarters.
Other policy impacts have already unwound, for example the unwind of a Perth electricity grant contributed around 0.2ppt to quarterly growth in inflation in Q2. The unwind of rent discounts in 2020 has been supporting still soft rent inflation. As net migration starts to resume, this will likely see rental inflation pick up again. Other policy decisions and economic features though are set to work the other way. The annual increases in the tobacco excise has ended (tobacco previously contributed around 0.5ppt to annual headline), a bumper harvest is likely to keep food prices low domestically, while a new low-cost carrier (Bonza) is set to take flight in 2022.
Global supply chain pressures are key source of upside risk given how persistent they have been, even though most still view these pressures as transitory. Protracted lockdowns in Sydney and Melbourne have likely muted the potential for passthrough in Q3, but such passthrough may emerge in Q4 and into 2022. The actual cost of goods account for around half of the retail cost structure in, which illustrates the longer supply chain pressures persist, the more likely firms will be forced to pass on the costs and test their degree of pricing power amid buoyant goods demand.
Importantly for monetary policy, the realisation of upside risks will not be enough to keep underlying inflation sustainably at target, with wages growth being a key determinant. Unless wages lift, it is unlikely a lift in core inflation driven by transitory supply chain pressures will be sustained at this stage. The RBA has been at pains to state that underlying inflation will need to be at target for several quarters, with wages growth at 3% plus. The RBA is also wary of the prolonged period of below target inflation prior to the pandemic that stemmed in part, from keeping policy too tight and which kept inflation/wage expectations low and inconsistent with the inflation target.
For our detailed look at the upcoming Q3 CPI, see CPI Preview
Chart 1: HomeBuilder impact on New Dwelling purchase CPI