Inflation high to ‘25

Treasury’s top official sees elevated prices persisting

The top bureaucrat at the Treasury department says inflation will not be back within the Reserve Bank’s acceptable margin “quickly” but will stabilise within two years.

Secretary Steven Kennedy said projections were for inflation to slow to 3.25 per cent by the 2024 June quarter and fall to 2.75 per cent the year after.

He also rejected claims of a wage price spiral, which the RBA had warned was likely in the face of persistent high inflation and a push for strong wages growth.

In his opening statement to a senate estimates hearing on Tuesday, Mr Kennedy said a tight labour market had helped to push up nominal wages growth.

The wage price index is expected to grow 3.75 per cent in the 12 months to the end of June before climbing to 4 per cent by the middle of next year.

The RBA said the uptick in the price of labour risked undoing the hard work of 11 cash rate rises to tame inflation.

But Mr Kennedy said “there are no signs of a wage price spiral developing”.

“Medium-term inflation expectations remain well anchored, and it is usual for wages growth to accelerate during an upswing in the economic cycle,” he said.

Real wage growth is expected by the March 2024 quarter, with Mr Kennedy conceding the ongoing high inflation and rising interest rates were “squeezing” household incomes and weighing on consumer spending.

“The impact of rising interest rates and elevated inflation differs markedly across household,” he said.

“Some carrying a large mortgage or with limited savings are likely to be finding conditions challenging.

“Furthermore, high inflation environments can be more challenging for those on low incomes, particularly if inflation is concentrated on central products such as food, energy and the cost of housing. The indexation of government payments to inflation will provide some protection”

Mr Kennedy said the government’s cost-of-living package released in this month’s budget, including its power bill subsidies, would not add to inflationary pressures.

He said as a result of the government’s intervention in the gas and electricity market, average national retail electricity prices were forecast to rise 10 per cent in 2023-24, down from the 36 per cent figure estimated late last year. Gas prices are expected to rise by 4 per cent compared with the 20 per cent estimate in the October budget.

Mr Kennedy also said investment in new dwellings was expected to contract 2.5 per cent this year, 3.5 per cent in 2023-25, and 1.5 per cent in 2024-25. He said increasing migrant arrivals would likely support demand for housing investment.

Mr Kennedy and his Treasury colleagues will be grilled throughout Wednesday.