While overall CPI inflation continues to moderate faster than the Reserve Bank of Australia’s (RBA) expectations, Jarden chief economist Carlos Cacho warned that ongoing strong housing inflation, especially rents, poses a barrier to returning inflation to the target band of 2-3%.
Cacho said that he expects rents to grow at an annual pace of 7% to 10% for the next two years, while there were few signs that inflation in the cost of building a new home was easing.
Since housing comprises around 22% of Australia’s CPI basket, this means there will be continued upward pressure on inflation, meaning other components of CPI will need to fall below 2.5% inflation for the RBA’s target to be met.
“Without moderation, the cost of renting and the cost of building a new dwelling could add almost 1 percentage point to headline inflation, Mr Cacho estimates”, reports The AFR.
“In that scenario, inflation in every other item in the CPI basket would need to be at 2.5% for aggregate inflation to fall within the top of the RBA’s target band”.
“So you can get there. But I think you basically need everything else to go right”, Cacho said.
Westpac chief economist is more hopeful that immigration will fall sharply, taking the pressure off rents.
“It will take a while, but the surge in rent inflation is perfectly correlated with the surge in population growth”, she said.
“And to the extent that [population growth] is going to mechanically roll over, you should expect rate inflation to start rolling over time as well”.
The latest monthly migration data isn’t promising, with net permanent and long-term arrivals accelerating at the end of 2023:
Source: Shane Oliver (AMP)
At the same time, all forward-looking indicators for housing construction have collapsed to around decade lows:
This suggests that rents will continue to grow at a swift pace, putting upward pressure on overall CPI inflation.
Whatever the case, the Albanese government’s idiotic mass immigration policy has delivered the nation a rental crisis and has made the RBA’s task of lowering inflation significantly harder.
