On Wednesday it was announced that inflation in Australia rose over the first quarter, causing the dollar to rise near half a per cent and stocks to initially fall. This rise in inflation complicates the calculations of Treasurer Jim Chalmers as he prepares his third budget. However, annual inflation is still tracking in the right direction, falling to 3.6 per cent in the 12 months to March from 4.1 per cent in the year to December.

What is of major concern is that quarterly inflation accelerated, clocking in at one per cent from 0.6 per cent in the three months to December. This was higher than the consensus forecasts, which had the quarterly rate rising 0.8 per cent in the three months to March for an annual pace of 3.5 per cent.

Contributors to Inflation

The Australian Bureau of Statistics reported that price rises across education (5.9 per cent), health (2.8 per cent), housing (0.7 per cent), and food and non-alcoholic beverages (0.9 per cent) contributed the most to the quarterly increase. These fast-rising prices have been putting pressure on Australian households.

Impact on Interest Rates

The inflation data has prompted the Reserve Bank to embark on aggressive interest rate hikes starting in May 20221. With the economy slowing and inflation generally heading in the right direction, the focus has shifted to the prospect of interest rate cuts by the central bank1. However, the chances of a cut in interest rates coming in 2024 have slimmed based on the recent data.

The firmer figures were enough to prompt Westpac to push back its forecast for cuts, from September to November, with Commonwealth Bank economists also leaning towards a later start than their base case of September. National Australia Bank and ANZ had already forecasted a November start and planned to stick with their predictions.

Statements from Key Figures

Treasurer Jim Chalmers stated that price pressures were lingering but called for perspective, with annual inflation tracking below Treasury’s forecasts in the mid-year budget update in December. He said, "The amount of spending matters, but the quality of spending matters, the timing of spending matters".

US Federal Reserve chairman Jerome Powell last week cautioned that persistently elevated inflation was likely to delay interest rate cuts until later this year, opening the door to a period of higher-for-longer rates. He stated, “Recent data have clearly not given us greater confidence” that inflation is coming fully under control and "instead indicate that it’s likely to take longer than expected to achieve that confidence".

Impact On HELP-HECs Debts

Early reports suggest millions of Australians with outstanding student loans, such as HECS-HELP debt, are expected to see their balances increase by approximately 4.8% on June 1 this year due to an annual indexation rate based on inflation. This rate is just an estimation, and a formal announcement will be made in the next couple of weeks.

This estimated indexation rate, while lower than last year’s 7.1%, is still the second highest in over a decade. The average HECS balance, currently around $26,500, would see an increase of $1272 due to this rate. Those with the means might consider making a voluntary payment to reduce their debt before the indexation is applied.

The upcoming indexation is likely to be another financial burden for many younger Australians already dealing with higher living costs. Some students feel like they’re not making progress despite having amounts deducted from their paychecks for repayments. The question of whether it’s worth paying off HECS-HELP debt before buying a home has become more relevant, especially for young Australians trying to enter the property market. The federal government has hinted at changes to the HECS-HELP system, including potential reforms to the way indexation is calculated and when it’s applied. These changes could be unveiled in the upcoming 2024 federal budget.

Conclusion

The Australian inflation data presents a complex picture of the country’s economic scenario. While the annual inflation rate is tracking in the right direction, the quarterly inflation rate has seen an unexpected rise. This has implications for the country’s interest rates and sets new expectations for the economy. As Australia grapples with these challenges, the statements from key figures like Treasurer Jim Chalmers and US Federal Reserve chairman Jerome Powell provide valuable insights into the possible future trajectory of the economy.