The biggest culprits contributing to this record are rents (the largest component in services),which rose 6.7 per cent for the year and 2.5 per cent for the quarter,insurance (up a hearty 8.5 per cent for the year),holiday travel and eating out.
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Demand for international travel has been strong particularly in the June quarter,which has put upward pressure on airfares – a bonus for airlines such as Qantas,which is set to announce record profit for the 2023 year andFlight Centre which upgraded its profit guidance last week.
Insurance companies have also received a re-rating by stock market analysts on the back of increased premiums. The latest data set on inflation justifies that position.
The Australian Bureau of Statistics says that higher wages,rents and utilities were contributing to higher input costs for those operating in services,but pricing power has also played a significant part.
Overall,services contribute 45 per cent of the consumer price index and goods make up 55 per cent,so tackling services inflation is essential to fight inflation.
The good news is that goods inflation is coming down faster than expected. Clothing and footwear were up only 0.3 per cent year-on-year,supporting analysts’ warnings that apparel retailers are set for a lean period ahead.
Household furniture and equipment delivered an unusually robust gain of 6.3 per cent for the year and 2.1 per cent for the quarter,which contrasts with warnings from companies such asHarvey Norman that warned of a slide in earnings this year.
Those like Smith,who sit in the camp that say the Reserve Bank has already gone too far on raising rates,reason that inflation has been caused by supply-side factors,and thus that interest rate increases have been mostly ineffective at bringing inflation under control. Rather,they say,inflation has fallen as a result of repairs to global supply chains and an easing of import prices.
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When it comes to excessive growth in rents,supply is clearly the major problem,and it is one that increased immigration only exacerbates.
Everyone agrees the dearth of housing stock is pushing up rents. And perversely,raising rates only deters investment into building more housing. This is one area that needs government intervention.
The latest inflation numbers signal that Reserve Bank governor Philip Lowe has a tough call to make. He has only two more opportunities to raise rates before he leaves the job.
It is hard to believe he won’t use one of them either in August or September.
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