- Despite headlines, the worst of inflation could still be behind us.
- Building costs and rents are starting to slow down.
- Inflation will stabilise if the RBA can hit pause on rate hikes.
While the Reserve Bank of Australia (RBA) is expected to once again increase the official cash rate (OCR) at next week’s meeting, slowing inflation could mean a pause is on the cards in the coming months.
CoreLogic’s Head of Residential Research, Eliza Owen said that the latest 7.8 per cent Consumer Price Index (CPI) reading is getting close to the RBA’s forecast of 8 per cent, while other inflation measures are starting to ease.
“Despite headline figures surprising to the upside this quarter, the worst of inflation could still be behind us,” Ms Owen said.
“Underlying core inflation, which is measured by trimming excessively volatile components of CPI, actually fell in the quarter, from 1.9 per cent in September to 1.7 per cent.
“Annual core inflation is still a long way from the 2-3 per cent target range set by the RBA, at 6.9 per cent.
“However, December marked the first fall in quarterly core inflation since March 2021, following eight consecutive interest rate rises from May 2022.”
High costs slowing down
Ms Owen said there’s also evidence to suggest some of the biggest contributors to inflation, such as building costs and rents are also starting to slow down.
“In Australia, many housing market metrics suggest the rate of growth in new build costs and rents is slowing, while falling property prices and volume of sales are taking the heat of the economy indirectly,” she said.
“The housing component has the highest weighting of any sub-group, so a slower rate of growth in housing costs is a key factor that should support a further reduction in both core and headline inflation.”
According to Ms Owen, housing costs were still up a substantial 1.9 per cent in the quarter, but this was down from a 3.2 per cent lift in the three months to September.
While rising interest rates have seen the pipeline of new dwelling approvals and commencements also slow down, which may take further pressure on the construction sector and costs of new home builds.
Growth in CoreLogic rent valuations, a leading indicator of CPI rents, also showed an easing trend in the December quarter.
Rates to set the tone for 2023
Ms Owen said the extent to which inflation slows down in 2023 will determine whether the RBA needs to keep tightening, or can hit pause on rate hikes.
“The inflation outlook remains important to the housing outlook,” she said.
“In the year ahead, inflation may be subject to the competing forces of falling global demand, but rising demand from China as the country moves away from zero COVID.
Given the slightly stronger-than-expected headline inflation result for December, along with the fact that core inflation remains well outside the RBA’s target range, a further increase in interest rates seems likely for February, and possibly March according to Ms Owen.
“This will likely mean further falls in housing demand and values in the months ahead,” she said.
“However, with inflation potentially moving through a peak, we are likely to see interest rates peak lower than some forecasters were expecting last year.
“Once interest rates stabilise, we would expect consumer sentiment to improve alongside a gradual stabilisation in housing prices.”
