Price Stability and 2024 Trends

Syllabus Topic

HSC Topic Four - Economic Policies and Management

Economic objectives in relation to:

• price stability

What is Price Stability

Price stability refers to maintaining a low and stable rate of inflation, ensuring that the general price level of goods and services in an economy does not experience significant fluctuations over time. This stability allows consumers and businesses to plan for the future with confidence, knowing their purchasing power will remain relatively constant. Central banks, like the Reserve Bank of Australia (RBA), aim to achieve price stability through monetary policy, targeting an inflation rate of 2-3% per year. Stable prices minimize economic uncertainty, promote sustainable growth, and prevent the negative effects of both high inflation, which erodes purchasing power, and deflation, which can lead to decreased spending and economic stagnation.

2024 Forecast

Inflation in Australia is slowing down and is expected to reach the target range of 2-3% by 2025, with the midpoint reached in 2026. While prices for goods have decreased, prices for services are still high due to strong demand and high costs. Higher interest rates are helping to balance demand and supply, but the current monetary policy is restrictive. The job market is gradually easing but remains tighter than ideal for stable inflation and full employment. The Reserve Bank of Australia (RBA) kept the cash rate target at 4.35% to help bring inflation back to the target range and support moderate job growth. The RBA stresses that low and stable inflation is important for economic health, possibly creating future rate hikes depending on economic conditions.

Implications

According to the RBA’s February 2024 statement on Monetary Policy, there are several implications that could arise with their policy on price stability.

Cash Rate Increases:

• Significant portion of rate hikes since May 2022 passed to borrowers and reflected in borrower rates.
• November 2023 increase reflected in advertised rates.
• Transition from low fixed-rate loans to higher rates in 2024.
• Higher mortgage payments consume more household income, increasing financial strain.

Housing Market:

• Slower housing credit growth compared to 2022.
• Recent rise in new lending.
• Potential dampening effect on the housing market.

Demand Growth:

• Tighter monetary policy has slowed demand growth.
• Weak household spending, with per capita spending declining.
• Strong business investment and public sector spending partially offset weak household spending.

Household Finances:

• High inflation, interest rates, and taxes reduce disposable incomes.
• Decreased spending and increased reliance on savings.
• Continued subdued consumer spending expected.

Labor Market:

• Labor market remains tight but is gradually easing.
• Slowing employment growth and increased labor supply due to strong population growth.
• Slight increases in unemployment and underemployment rates.
• Robust wages growth, but signs of slowing in some areas.
• Low productivity contributing to high labor costs.

Economic Growth:

• Expected slowdown in economic growth both domestically and among major trading partners.
• Subdued GDP growth outlook in the near term.
• Recovery in consumption growth expected as inflation moderates and real incomes rise.

Monetary Policy:

• RBA kept cash rate at 4.35% to manage inflation and labor market conditions.
• Commitment to returning inflation to target range while monitoring economic data and risks.
• Potential for future rate adjustments based on evolving economic conditions.

Risks:

• Prolonged high inflation could erode purchasing power and necessitate more monetary tightening.
• Potential for higher unemployment if further tightening is required.
• Stronger-than-expected consumption could stabilize inflation sooner.

Sources

RBA: Australia's Inflation Target - Explainer

RBA: Statement on Monetary Policy - February 2024