Challenges in Managing Inflation

In August, inflation increased by 5.2%, marking the first acceleration in four months. This rise was primarily driven by higher fuel prices and increased rents. Petrol prices surged by 9.1% last month and have continued to rise, reaching $2.11 per litre. Bread and cereal prices increased by 10.4%, while fruit and vegetable prices dropped by 8.3% over the year. Additionally, holiday travel and accommodation costs increased by 6.6% in the twelve months leading to August 31. This inflation rate aligns with market economists' expectations, but underlying inflation, excluding volatile items and holiday travel, rose by 5.5%. Although inflation has eased from its December peak, achieving the Reserve Bank of Australia's target of 2% to 3% by late 2025 may be a volatile and non-linear process.

The Reserve Bank of Australia (RBA) is closely monitoring inflation, the labor market, and household spending, with the possibility of raising interest rates in the future, according to new RBA Governor Michele Bullock.

The central bank is expected to await the September quarter consumer price index data in late October before making a decision on the current 4.1% cash rate. While the RBA typically focuses on underlying inflation, excluding volatile fuel and food costs, it acknowledges that sustained high fuel prices can impact prices across various sectors. Ahead of the monthly inflation data release, cash rate futures indicate a 65% chance of the RBA raising the cash rate to 4.35% by February of the next year. This follows a moderation in price pressures in July, when the monthly inflation rate dipped to 4.9%.

Treasurer Jim Chalmers has commented on the volatility of monthly inflation figures, emphasizing that they can fluctuate significantly from one month to the next. Chalmers noted that while inflation is moderating, there is a desire for it to do so more rapidly. He highlighted that inflation reached its peak in the quarterly terms during the first quarter of 2022 and in annual terms around the Christmas period. Chalmers also stressed that managing inflation remains a primary challenge for the Albanese government, which is actively implementing measures to alleviate cost-of-living pressures without exacerbating inflation.

Source: https://www.afr.com/policy/economy/inflation-jumps-for-first-time-in-four-months-20230927-p5e7vp