Inflation is coming down, but cost of living continues to bite

It is important not to confuse Australia’s easing inflation with the end of our cost-of-living crisis. The pain isn’t over yet and won’t be for quite a while.

Wednesday’s inflation read of 0.6 per cent for the December quarter should be celebrated because it provides no foreseeable excuse for the Reserve Bank to raise interest rates again in this cycle.

We all need to live somewhere, and the cost of renting remains an inflation driver.
We all need to live somewhere, and the cost of renting remains an inflation driver.

Responding to Wednesday’s significantly weaker-than-expected inflation figure, a rash of economists brought forward their estimates for the timing of the central bank’s first rate cut – although consensus still sits around the September quarter.

This will be a reprieve for those with a mortgage, but it’s not a panacea for the cost-of-living pain.

Another three quarterly inflation reads at 0.6 per cent would add up to 2.4 per cent price growth over a year – which is within the 2 to 3 per cent band the RBA deems acceptable.

Of course there is a possibility that some external event might upset the linear glide path down, but it’s likely that the monthly and quarterly inflation figures will continue to trend down.

The rate of inflation falling doesn’t mean prices are falling – it just means that they aren’t rising as fast.

The continued fall in inflation will also become a little more challenging when government subsidies for rent and energy start to roll off.

But the rate of inflation falling doesn’t mean prices are falling – it just means that they aren’t rising as fast.


Goods and services were still more expensive in the three months to December than they were in the three months before that. And will be higher again in the current March quarter.

That said, the rate of inflation is coming down faster than even the RBA had forecast, suggesting that the central bank now has its arms around the problem.

This doesn’t solve the cost-of-living issue – many people are still finding it tough to balance their household budgets.

There are two things that need to happen to loosen the grip that is squeezing Australian wallets – interest rates need to start falling and wages need to rise faster than inflation.

Economists including Stephen Smith, a partner of Deloitte Access Economics, say that wages in the December quarter grew faster than inflation, so we experienced real wages growth.

But there is a lot of catch-up to do before we have the same purchasing power we had before the pandemic.

The pain will have a long tail.

The trouble is that there are certain categories within the basket of goods and services making up the inflation figure that remain elevated, and some cannot be avoided.

The most significant price rises in the December quarter were tobacco (up 7 per cent), and the cost of new houses (up 1.5 per cent), while domestic holiday travel and accommodation costs 3.9 per cent more and medical and hospital service expenses grew 1.2 per cent.

Insurance also stands out as one of the stickier inflation items, and there are few signs that this is going to improve.

People may reduce their smoking habit or cancel holiday plans, but we all need to rent or own a house. Seeing a doctor is not a discretionary item and arguably neither is insurance.

Most other categories are rising, but at a lesser rate than experienced in the previous quarter.

And there are some like transport, education, and household furnishings and equipment in which prices are actually falling.

Particularly weak retail spending numbers for December demonstrated that Christmas was a disaster for retailers, and spending is expected to remain weak for some time yet, according to Smith.

That weakness will only reverse when real wages begin to rise in earnest and interest rates come down meaningfully.

Both will happen, but don’t hold your breath.

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