Here in our little corner of the world, there is one phrase that has often come to define the Australian economic experience – “it’s different here”.
From the Asian Financial Crisis all the way up to the GFC, Australia managed to avoid recession again and again, even when its peers and some of the world’s largest economies weren’t so lucky.
Now, as Australians hope that the nation’s near-legendary luck in avoiding recessions holds out once more, it’s worth exploring that things being “different here” is not always a positive thing.
In the United States and Europe, headline and core inflation (inflation excluding food and energy) are both slowly coming down from their cyclical peaks.
While inflation is moderating in Australia, there is a key difference between the outlook for Australia and much of the rest of the developed world.
In Australia, there are key consumer price index (CPI) components that are arguably yet to see their peak, while for much of the rest of the developed world, the peak is already in the rear-view mirror.
Perhaps two of the most notable are residential rents and household energy costs.
A great divergence
In the US, electricity price inflation peaked in August and in October in the European Union. In Australia, the peak in electricity price inflation likely still lies ahead.
Part of the reason for this discrepancy is that Australian electricity prices as measured by the CPI fell during the pandemic and only rose above their pre-Covid peaks in the December quarter of last year.
As things currently stand, electricity prices are 1.8 per cent above their pre-Covid peak recorded in December 2018.
Meanwhile, in the Euro area, electricity prices at their peak were 72.6 per cent above their December 2018 level and 25.3 per cent higher in the United States.
On July 1, the average cost of electricity rose by between 19.6 per cent and 23.9 per cent in NSW, South Australia and southeastern Queensland. In Victoria, electricity prices rose by an average of 25 per cent.
While the impact of rising electricity prices will be blunted by the joint federal government and state and territory government energy bill relief measures, the impact of these measures is temporary and higher energy costs will feed into the headline CPI during the following quarter after their implementation.
It’s the lag
As pretty much anyone who plays video games online can tell you, lag can really mess up your day. In this, the Australian CPI is no different.
At first glance, there appears to be a lag of around 18 months between advertised asking rents rising and an impact of a similar magnitude being felt within the CPI.
It is worth noting that this is partially down to the fact that the ABS and private rental price data providers measure different things.
The ABS measures a sample of all rentals, including existing leases, while private providers such as SQM or Domain measure asking rents for properties advertised for lease. Rental components of CPI’s lagging asking rents significantly is relatively common for national statistics agencies throughout the developed world.
But there is another factor that is unique to Australia that will see the CPI continue to produce high rental inflation figures for quite some time to come, a later peak in asking rents.
In the US, the growth in asking rents peaked in around February 2022, depending on which private rental data provider you ask. For Australia, Domain saw a peak in rents in Q1 2023 and SQM in Q4 2022.
If we lag the results of Domain’s asking rents by 18 months, they line up relatively well with the rental price growth seen in the CPI. If a lag of around this magnitude is maintained, the rental component of the CPI should peak in approximately Q3 2024.
What it means for headline inflation
With household energy and rental price inflation to remain well into next year, these two CPI components could play a major role in keeping inflation uncomfortably high.
To explore this we’ll look at several different scenarios of varying degrees of severity.
Scenario 1 – Rents rise by 10 per cent as predicted by the RBA, gas and electricity costs rise by 20 per cent
Scenario 2 – Rents rise by 11.8 per cent as seen in PropTrack’s figures, gas and electricity costs rise by 22.5 per cent
Scenario 3 – Rents rise by 14.4 per cent as seen in Domain’s figures, gas and electricity costs rise by 25 per cent
Scenario 4 – Rents rise by 24.6 per cent as seen in SQM’s figures, gas and electricity costs rise by 25 per cent
Based on these scenarios, the rental and household energy cost components of the CPI would contribute somewhere between 1.37 percentage points and 2.21 percentage points to the headline CPI figure.
Considering that these two factors that make up less than 9 per cent of the overall CPI basket are driving such a significant amount of inflation on their own makes the challenge of returning to the RBA’s 2-3 per cent target band all the more difficult.
It’s different here
For these reasons among others, the inflation situation really is different in Australia to much of the rest of the developed world.
While we have seen the same easy lower fuel price gains as the rest of the world, the path back to the RBA’s inflation target faces some sizeable hurdles that a lot of other nations don’t.
It’s also worth noting that a resurgence in inflation due to rising fuel costs is increasingly seen as a strong possibility in the US and in Europe.
While this trend is far less potent in Australia’s fuel price figures, it remains a factor that could further complicate the fight against inflation.
During the early part of the global battle with inflation, it appeared that Australia might be spared somewhat from the challenges that lay ahead.
But unfortunately, upon examining the data, it becomes clear that it was lags making things appear much more favourable than they would eventually become.
Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator