Economists think inflation is about to do something 'unusual' — and it could impact rates
From the third quarter of this year, economists think headline inflation will fall into the 2% to 3% range. But the RBA’s preferred measure will be markedly higher. This poses a challenge.
Rate setting is about to get awkward for the Reserve Bank. That’s the chatter from economists, who are watching closely to see how the central bank responds to government energy subsidies aimed at helping ease the public’s cost of living concerns.
The delicate communications challenge for the nation’s central bankers is that the Albanese government’s $3.5 billion energy subsidy relief will help shave 0.75 percentage points off the headline inflation rate this year and 0.5 percentage points next year. But it’s not expected to do much for the RBA’s preferred measure of inflation — the trimmed mean — which cuts out volatility and short-term relief.
Here is where a collision is expected. According to Treasury’s forecasts, headline inflation is expected to be in the 2% to 3% target range in 2024-25. However, the trimmed mean is not anticipated to return to the target range on the RBA’s latest forecasts until late 2025.
With an election looming that’s likely to centre around the cost of living crisis, the government may well be tempted to point to its success on the headline rate of inflation. This could leave the RBA with the challenge of communicating the technical complexities when handing down a decision on rates. Some economists think it may even deter further rate increases.
