(ISSN Digital 2208-0325) Volume 31 Issue 2 February 2024

Inflation continues to moderate

Consistent with the trend around the broader However, the most significant contributor to
global economy, Australia’s inflation rate has inflation in the December quarter was the
continued to pull back from its recent peak. The tobacco category, where prices rose by 7.0%.
Consumer Price Index (CPI) rose by 0.6% in the 3 Tobacco prices increased due to the introduction
months to December, which was 0.6% below the of a 5% annual excise indexation and a bi-annual
increase recorded in the September quarter. In wage indexation applied in September.
annual terms, Australia’s inflation rate dropped The chart below shows the actual “headline”
from 5.4% to 4.1%. The recent peak of 7.8% inflation rate along with the “underlying” rate of
recorded in December 2022 was the highest inflation. This underlying measure of inflation
annual rate recorded since March 1990 and came removes seasonal factors, outliers, and more
about very quickly after the COVID crisis ended. volatile components of the CPI, to measure the
The December quarter CPI result was impacted core rate of price increase. The “underlying” rate
by a lower rate of increase for several categories has become a more important area of focus for
of goods, whereas service categories, being more policy markers over the past 4 years as the COVID
influenced by wage levels, are showing more crisis and global energy shortages have created
persistent inflation. A 1.0% decline the significant temporary influences on the CPI
“Household Contents & Services” category was calculation. As the chart demonstrates, the
the largest contributor to the lower rate of underlying measure of inflation is less volatile
growth in the overall CPI, with a 4.3% fall in the than the “headline” unadjusted CPI measure.
furniture sub-category being a large component
of this. Automotive fuel (down 0.2%) was one
other key goods category to show price decline,
with the price of motor vehicles also declining.
Both motor vehicles and automotive fuel had
previously recorded sharp increases due to
supply constraints prevailing as economies
reopened after the COVID crisis.
Partially offsetting the above areas of price
reduction was a higher rate of increase in the
price of some services. Housing rents (up 0.9%)
continued to make a major contribution to Source: Australian Bureau of Statistics

inflation and have now risen by 7.3% over the The chart highlights that the underlying rate of
past year. The quarterly increase in rent would inflation steadily declined between 2008 and
have been higher at 2.2% if not for changes to 2020. It did, however, increase sharply in the post
the Commonwealth Rent Assistance program. COVID crisis period, but has subsequently
Low vacancy rates and strong demand driven by declined. The underlying rate is currently
population growth has placed upward pressure calculated to be 4.3%, which is only marginally
on rents over the past year. Also notable was a above the headline rate of 4.1%. This underlying
3.8% quarterly increase in house, contents and rate of inflation remains well above the Reserve
motor vehicle insurance, with higher premiums Bank’s longer-term average target range of 2% to
reflecting rising reinsurance, natural disaster and 3%.
claims costs. Annually, the insurance category has
now increased in price by 16.2%.

Published by Plain English Economics Pty Ltd. PO Box 522 Jannali NSW 2226 Email: info@plain-english.com.au
plain-english.com.au
Australia’s experience with inflation following the As indicated on the chart above, unemployment
COVID crisis is consistent with that of most other remains well below the level prevailing prior to
developed economies. Supply constraints (due to the COVID crisis. The lack of immigration and
the lower production in lockdowns and population growth in 2020 and 2021 created
subsequently the War in Ukraine) combined with labour shortages in various industries, with job
the sharp increase in demand upon economic vacancies escalating to record high levels.
reopening (supported by both expansionary However, job vacancies have started to decline,
monetary and fiscal policy) saw goods prices rise with the latest data from November 2023
sharply. Goods inflation has now started to showing 388,800 vacancies. This is a decrease
subside around the globe; however, it remains to from the peak of 475,800 in May 2022, but still
be seen how quickly inflation can return to target well above the pre-COVID period level of
levels. Much will depend on the persistence of 230,600.
services inflation and the extent to which higher
wages growth underpins prices for service items. The 3.0% annual increase in the size of the
workforce represents a combination of the
Q1: Discuss the factors that have contributed to change in the adult population size and the
Australia’s inflation rate falling from recent peak change in the “Workforce Participation Rate”.
levels. The Workforce Participation Rate refers to the
percentage of the adult population that is in the
Q2: Explain why inflation rose in the period
immediately following the COVID crisis. workforce (i.e. either employed or seeking
employment). After dropping sharply at the start
Unemployment shows slight increase of the COVID-19 shutdowns, the Workforce
Participation Rate recovered quickly and at 66.8%
After reaching a cyclical low of 3.4% in October is currently near a historical high.
2022 as the economy recovered from the COVID
crisis, Australia’s unemployment rate has The rise in unemployment over the past year is
increased modestly over the past year. In the consistent with a period of lower economic
month of January 2024, the unemployment rate growth. Employment is generally considered to
moved from 3.9% to 4.1%. be a "lagging" indicator of economic growth. That
is, movements in employment will follow
Unemployment will increase when the number of movements in the rate of economic growth. This
workers employed grows by less than the growth is because firms often delay making decisions to
in the size of the workforce population. Over the change employment levels until they perceive
year to January, the workforce population has that changing economic conditions have some
increased by 3.0%, which is a significant pick-up permanency. High costs (e.g. training) associated
from the COVID impacted periods of 2020 and with either increasing or reducing employment
2021 when there was minimal immigration. are an important factor in creating this "lag".
There has been an increase in employment of
2.6% over the same period. As the increase in With unemployment “lagging” trends in the
employment has fallen short of the rate of wider economy, there may be further
increase in the workforce population, the rate of deterioration in the unemployment rate because
unemployment has risen. of the sharp tightening of monetary policy that
has taken place in the Australian economy over
the past 2 years. It would be expected that higher
interest rates would lead to a contraction in
spending, which would then reduce the demand
for labour and cause unemployment to rise.

Although being a “lagging” indicator,

unemployment trends can also influence the
direction of future economic growth. For
example, rising unemployment can create a
negative feedback loop or “vicious circle”
Source: Australian Bureau of Statistics whereby consumption spending declines because

2
of unemployment. The fall in spending can then an unusual situation as wage costs have typically
lead to lower economic growth and further risen at a rate above inflation. Improving labour
unemployment. It is this threat of a “vicious productivity (i.e. the level of output generated by
circle” that adds to the importance policy makers each unit of labour) will normally create capacity
place on the goal of avoiding high rates of for businesses to support real wage growth.
unemployment. The introduction of the “Job However, the lack of real wages growth over
Keeper” program during the COVID-19 crisis was much of the past 2 years implies that living
aimed at mitigating this “vicious circle”, by standards of the majority of Australian
maintaining household income levels despite the households have declined.
lack of opportunity for many employees to earn a
wage during business lockdowns. Movements in wages growth will typically reflect
Q3: Outline why unemployment is considered to be a
changes in the balance of supply and demand for
“lagging” indicator. labour. Healthcare was the sector showing the
strongest wage growth of 5.5% over the past
year. This is likely to reflect growth in demand for
Q4: Describe one of the factors likely to be contributing
healthcare workers, because of the ageing of the
to the increase in unemployment over the past year.
population and also the ingoing expansion of the
Wages growth picks up National Disability Insurance Scheme (NDIS).
Despite job vacancies coming off their recent Education & Training showed the second highest
highs, and unemployment starting to increase, annual wages growth rate of 4.8%. With both
the rate of wages growth has accelerated slightly healthcare and education having a high public
across the Australian economy. In the December sector component, they contributed to growth in
quarter of last year, the seasonally adjusted public sector wages being marginally higher (up
Wage Price Index rose by 0.9%, resulting in the 4.3%) than private sector wages (up 4.2%) over
annual rate of wages growth increasing from the 12 months to December.
4.1% to 4.2%. (The Wage Price Index measures
changes in the price of labour across the Given that unemployment remains relatively low
Australian economy). and job vacancies are elevated (albeit below
recent peaks), further acceleration in wages
The 0.9% quarterly increase was below the 1.3% growth remains possible. High levels of job
increase recorded in the September quarter. vacancies may provide workers with more
However, the September quarter data was bargaining power to push wages growth further
impacted by the legislated minimum wage above inflation. Workers’ bargaining power may
increase of 5.75% per annum from July last year. also be enhanced by new legislation brought in
by the Commonwealth Government in December
2022, which aims to remove some of the barriers
to wage bargaining and provide additional
support for multi-employer (industry based)
bargaining. However, with the workforce
population growing at an above average rate,
some of the current higher-than-normal job
vacancy levels may be absorbed by this
workforce growth and take some upward
pressure off wages.

Source: Australian Bureau of Statistics Higher wages can create a “wage-price spiral”.
However, the current rate of growth in wages is
With inflation in the year to December being not considered to be adding materially to
4.1%, the latest wages data suggests there has inflation pressures in the economy. In fact, as per
been a very small increase of 0.1% in wages in the following extract from the Reserve Bank’s
real, after inflation, terms. This follows a period February Board meeting minutes, the central
in which real wages growth had been negative bank believes weaker conditions in the labour
i.e. the increase in inflation was higher than the market should eventually start to take some
increase in wages. Negative real wage increase is pressure off the rate of growth in wages:

3
 “Conditions in the labour market were expected to growth. Lower spending may also reduce
ease further over the coming year or so, to levels pressure on prices, leading to a dampening of
consistent with sustained full employment. inflation.
Employment was expected to continue to grow
moderately, though slower than the working-age With both inflation and consumer spending
population, and the unemployment rate and the showing signs of softening, the significant
broader underutilisation rate were expected to tightening of monetary policy that has already
increase further. Nominal wages growth was expected taken place may now be having the desired
to remain robust in the near term before moderating effect. The RBA now expects inflation to be back
in response to further easing in the labour market. within the target 2% to 3% range in 2025.
Members noted that the outlook for wages growth
was consistent with the inflation target, on the However, despite the evidence of weakening
assumption that productivity growth increases to demand and lower forecast inflation, the central
around its long-run average.” bank has stopped short of indicating that the
higher interest rate cycle is complete and has
Q5: Evaluate whether current labour market conditions suggested that further tightening may be
are likely to be conducive to higher or lower future rates
necessary. Following the Board meeting in early
of wages growth.
February, the RBA emphasized the degree of
uncertainty in its policy outlook as follows:
Monetary policy remains on hold
“Members agreed that it was important for the
The recent moderation in inflation is likely to
Board’s public statement to make clear that inflation
have been a key factor in the Reserve Bank (RBA) had moderated but was still high, and that it was not
keeping its current monetary policy position yet possible to rule in or out further increases in
unchanged at the February Board meeting. After interest rates. Members also agreed on the
increasing the cash interest rate to 4.35% in importance of highlighting the uncertainty
November last year, the RBA has maintained this surrounding the economic outlook and the need for
rate at the last two Board meetings. This pause in monetary policy to be driven by developments in
policy changes follows a series of interest rate relevant data, the outlook for the economy and the
increases from May 2022 onwards when the cash evolving risks.”
rate was at its “emergency setting” of just 0.10%.
The February Board meting was the first meeting
held under the new Statement on the Conduct of
Monetary Policy. Board meetings will now be
held 8 times each year (down from 11
previously), with meetings held in February,
March, May, June, August, September,
November and December.

Q6: Evaluate the rationale for the RBA’s recent

decision to leave the cash rate unchanged at 4.35%.
Q7: Describe the changes in economic conditions that
would be likely to result in the RBA re-commencing its
program of lifting interest rates.

Source: RBA
Stats on Australia Latest Previous Year
By significantly raising interest rates over the past
Economic Growth 2.1% (Year to Sep) 5.8%
two years, the Reserve Bank has attempted to Inflation 4.1% (Year to Dec) 7.8%
dampen spending growth. Higher interest rates Unemployment 4.1% (Jan) 3.6%
make it more expensive for individuals and firms Employment Growth 2.6% (Year to Jan) 3.7%
to borrow, thereby providing reduced incentive Wage Price Index 4.2% (Year to Dec) 3.3%
Exchange Rate (TWI) 61.1 (29 Feb) 61.4
for loan funded expenditure. In addition, higher Cash Interest Rate 4.35% (Feb) 3.35%
interest rates also provide more incentive for Current Account Surplus $30.3 bn (Yr to Sep) $19.9 bn
saving, making consumption expenditure less Current Acct (% GDP) 1.2% (Year to Sep) 0.8%
attractive on a relative basis. In this way, a Foreign Debt (% GDP) 45.0% (End Sep) 48.5%
tightening of monetary policy can lead to Source: Australian Bureau of Statistics & Reserve Bank
reduced spending, potentially slowing economic
Plain English Economics Pty Ltd is a Corporate Authorised Representative of First Point Wealth Management P/L (AFSL 483004). Any advice provided is of a general 4
nature and does not take into account personal circumstances. Any decision to invest in products mentioned in this document should only be made after reviewing the
relevant Product Disclosure Statements. Whilst we attempt to ensure the accuracy of information contained in this publication, no liability is held by the publishers as a
result of any use of the contents of this document.