Finance Finance News Why some economists believe the Treasurer is being too pessimistic

Why some economists believe the Treasurer is being too pessimistic

Treasurer says inflation to approach 8 per cent.

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Millions of Australian households are facing a “difficult” year ahead as the cost of living soars and economic growth weakens, Treasurer Jim Chalmers has warned.

Dr Chalmers told Parliament on Thursday that Treasury forecasts now predict inflation will peak at 7.75 per cent over the December quarter.

That’s much higher than the government feared before the election and up from 6.1 per cent in the June quarter – not to mention much higher than forecast wages growth.

But despite all the doom and gloom, some economists say the latest news on inflation is actually more encouraging than the Treasurer is letting on.

What’s more, some even believe that the pace of price rises has already started to ease.

Is inflation peaking?

Understandably, Wednesday’s headlines focused on how inflation had risen to its highest level since the GST was introduced in June 2001.

But buried in the detail of the Consumer Price Index was the revelation that prices rose at a slower pace in the June quarter than they did in the March quarter.

Quarterly inflation came in at 1.8 per cent – down from 2.1.

And retail sales figures released on Thursday also suggest that consumers are beginning to tighten their belts. (More on that later.)

Some economists said the data showed the RBA’s interest rate hikes were starting to slow demand, which will make it harder for firms to raise prices further.

One such economist is BIS Oxford senior economist Sean Langcake.

Mr Langcake told The New Daily that for Treasury’s forecasts to be realised, prices would have to rise in the September quarter by more than they did in the March and June quarters – something he said was unlikely given key global pressures like high oil prices are starting to ease.

“Prices aren’t going to keep going up [that fast],” Mr Langcake said.

Meanwhile KPMG senior economist Sarah Hunter said Wednesday’s inflation reading was lower than expected.

“I expect that the rate of annual inflation will still be close to 7 per cent over the next 3 to 6 months,” Dr Hunter said.

“[But] compared to the updated Treasury forecasts .. I am more optimistic.”

The Reserve Bank also has lower inflation forecasts than Treasury has penciled in, currently predicting a 7 per cent peak in the December quarter

But the RBA will publish updated forecasts for inflation next week.

Governor Philip Lowe said earlier this month that global factors that have driven up inflation to date are now starting to ease, suggesting that much-needed relief for households is on the way in coming months.

“Delivery times are improving and some supply bottlenecks are easing as firms adjust to the new operating environment,” Dr Lowe said.

“The effects of this and some re-balancing in consumer demand are now evident in some global markets, with declines in the global prices of products as diverse as computer chips and timber.”

The RBA has passed through three interest rate hikes since May in a bid to curb rising prices; economists said this will play a role in curbing inflation over the next six to 12 months.

Retail sales slow

In fact, some experts said there are already signs that higher rates are changing consumer spending behaviour.

Official retail sales data for June published on Thursday cut monthly growth in the dollar value of retail spending to 0.2 per cent, despite the recent price rises inflating the figures.

Mr Langcake said that implies households bought fewer goods over the month – a sign that the RBA rate hikes are working to subdue demand.

“We’re probably starting to rein in demand a little bit,” he said.

That should please the RBA, because it means businesses will find it harder to increase prices further without suffering a larger fall in sales.

But not everyone took the same view as Mr Langcake.

ANZ Bank senior economist Adelaide Timbrell said it was too early to say spending had fallen.

“ABS retail [data] measures retailer revenue, not household spending, so lots of outbound travel could lead to weak retail growth,” she said.

And Mr Langcake also noted that one key uncertainty for the September-quarter inflation data was soaring energy prices.

“It’s possible rising electricity bills are enough to push price growth to 7 per cent,” he said.

The Australian Bureau of Statistics will release inflation data for the September quarter on October 26.