The cost of living has continued to grow as a perfect storm of factors drive prices higher, predicting another interest rate rise when the RBA meets next week.
The Consumer Price Index (CPI) rose 1.8% in the June quarter, pushing the annual rate to 6.1% – slightly below expectations, but still the fastest annual increase in more than two decades.
The annual rise in the CPI is the largest since the introduction of the goods and services tax (GST).
Shortages of building supplies and labour, high freight costs and ongoing high levels of construction activity continued to contribute to price rises for newly built dwellings. The CPI’s automotive fuel series reached a record level for the fourth consecutive quarter.
Flooding along Australia’s east coast pushed up fruit and vegetable prices, while bread and breakfast cereals were affected by the war in Ukraine which has driven up wheat prices. Furniture, clothing and accommodation costs also rose.
Trimmed mean inflation, which strips out volatile or one-off price changes, rose 1.5% in the June quarter to be 4.9% higher over the year – the highest annual rate on ABS records and well above the RBA’s inflation target of 2-3%.
What it means for interest rates?
Many borrowers have already seen their mortgage repayments rise as lenders pass on the latest rate hikes to customers with a variable home loan. Unfortunately interest rates are a blunt tool and while inflation remains well above target and rising, it is unlikely the RBA will do anything but lift rates.
A winter spike in power prices, increasing rents and further growth in food costs are expected to drive inflation higher in the months ahead.
The RBA expects price growth will peak by the end of 2022, before falling back towards its 2-3% target range next year. The RBA has already indicated they expect that inflation will peak at 7% in the December quarter, so we can expect more hikes.
Forecasts of how high interest rates will vary between economists, however the consensus is for another double-sized interest rate hike in August. The interest rates have risen from 0.1% to 1.35% since May, including two 50 basis point increases in both June and July – double the size of a regular rate rise.
Housing slowdown to accelerate
We’ve seen interest rates fall for 11 years, price growth has surged over the past two years and there was an expectation that rates wouldn’t rise until 2024. Now they are rising sooner and much more rapidly than anyone expected..
Higher rates reduce borrowing capacities and force people to reduce their discretionary spending and dedicate more of their income to their mortgage, and we expect that this will push prices lower over the coming period.
Since the March peak, PropTrack data shows home prices have fallen 0.5% nationally.
New forecasts released in the PropTrack Property Market Outlook see prices falling 2-5% by the end of this year, and a further 7-10% by the end of 2023.