Presented by Jones Partners
Inflation: 6.0 per cent
Inflation continues to decline, and whilst progress was initially slow, a more meaningful reduction this past month has occurred. Increasing trade with China (alleviating supply chain issues and increasing supply) and increasing immigration are important contributors to this reduction. Whilst this progress is promising, there is still a long road ahead before this statistic reduces to the target 2-3 per cent. Inflation will likely take a couple of years to return to a healthy level, particularly if the RBA continues to pursue a “soft landing” for the Australian economy. If the RBA instead pursued a more aggressive approach to interest rates (such as that adopted by New Zealand or the United States) then inflation would likely fall far quicker.
Cash Rate Target: 4.10%
After several hikes, the RBA has decided to continue its pause for the third consecutive month, remaining at a steady 4.10%. Future cash rate hikes cannot be ruled out, particularly if more meaningful progress to reduce inflation is not made. High inflation over an extended period can have severe consequences for the economy, eroding the value of savings, causing a decline in enterprise, and purchasing power. A change in cash rates is the only effective mechanism to control it.
Economic Growth 2.3%
Economic growth continues to slow in response to increasing cash rates. A technical recession is defined by two consecutive quarters of negative economic growth. Given the current inflation rate is still high, economic growth will likely continue to decline over the coming months, with negative growth periods remaining a strong possibility. Whilst a “soft landing” and a recession avoided is still achievable, it seems unlikely.
Wage Growth 3.7 per cent
Wage growth remains relatively consistent since the last update, still falling well behind inflation. Excessive wage growth can have a detrimental impact on reducing inflation, in what is called a “wage-inflation spiral”. However, it is also important that wage growth remains steady enough to protect spending and consumption patterns to reduce the severity of a recession, should one occur.
Unemployment Rate: 3.5 per cent
The unemployment rate remains surprisingly low. A tight labour market with low unemployment increases the bargaining power of workers, which usually causes wage growth, which can further jeopardise inflation. The inflation rate generally falls more quickly when unemployment begins to rise. However, the unemployment rate has not changed since February, and many considering this to be a point of concern.