Statement on Monetary Policy – November 20242. Economic Conditions

2.1 Global economic conditions

Inflation in advanced economies has continued to ease broadly as expected, or in some cases a little quicker, giving central banks confidence that it is returning sustainably to their targets.

Core inflation in advanced economies has continued to ease broadly as expected. While it remains above rates consistent with central banks’ targets in most peer economies – with Australia sitting at the upper end of the range – many central banks have communicated greater confidence that inflation is returning sustainably to their targets (Graph 2.1). That confidence reflects further progress on disinflation, a slackening in labour markets and in some cases weaker-than-expected recent activity – all of which is consistent with the restrictive stance of monetary policy in most advanced economies. With upside inflation risks seen to be receding, some central banks have become more attentive to downside risks to activity, labour markets and, in some cases, inflation (see Chapter 1: Financial Conditions).

Headline inflation has eased more quickly than expected in Canada and the United States since the August Statement. In the United Kingdom and the euro area, headline inflation is temporarily close to target, owing partly to government policies having reduced energy prices for a time. Energy inflation is expected to increase across advanced economies in coming months as price falls last year drop out of the year-ended inflation calculation, supporting a slight pick-up in headline inflation in several advanced economies.

Services inflation has continued to decline in advanced economies (Graph 2.2). Housing services inflation has remained particularly sticky (including in Australia) but is expected to ease gradually. In the United States, rent inflation has slowed substantially but remains above its pre-pandemic average; other economies have seen a moderation in market rents, which suggests that CPI rent inflation will ease gradually from its recent peaks.

Non-housing services inflation remains elevated in some advanced economies, though it is around its historical average in the United States and Canada. Labour costs are an important contributor to non-housing services inflation. Wages growth has continued to moderate in most advanced economies but remains high, in part reflecting some catch-up to prior price increases. In turn, growth in unit labour costs remains high and has moderated only gradually – except in the United States where it has declined rapidly because of strong productivity growth. Some central banks have noted that weak demand and rising labour market slack will weigh on wages growth and on firms’ ability to pass on input cost increases to consumers, resulting in a moderation of non-housing services inflation.

Goods inflation remains low in advanced economies and a continuation of recent falls in Chinese export prices is a downside risk. However, geopolitical tensions and high shipping costs continue to present upside risks to the outlook. Oil prices increased over October due to the escalation in the conflict in the Middle East; that said, prices remain below recent peaks. While global shipping costs have fallen from their July peak, shipping costs for routes from China to Australia and New Zealand have not yet eased much (Graph 2.3).

Labour markets in advanced economies have continued to ease broadly as expected, though Australian labour market conditions are tighter than in peer economies.

Unemployment rates have continued to increase – in most cases broadly as expected by central banks – consistent with restrictive monetary policy and, in many cases, below-trend growth. In some advanced economies, the easing in labour market conditions has continued to be supported by high population growth or rising participation rates (or both). However, labour demand has also continued to soften. To date, in most economies this softening has largely come through lower levels of new job creation, with firms cutting back on hiring rather than engaging in widespread layoffs. New Zealand, where layoffs have increased significantly, is a notable exception. Vacancy rates have also continued to decline such that they are now back to pre-pandemic levels in most peer economies. In the United States the unemployment rate fell in August and September, unwinding a larger-than-expected increase in July, consistent with there being only a gradual easing in labour market conditions there. In most advanced economies labour markets are now either close to balanced or have spare capacity.

Employment growth remains low in most advanced economies. Employment growth has been weaker than expected in some economies that have also experienced weaker-than-expected GDP growth (e.g. Canada and New Zealand). Most central banks expect only modest further easing in labour markets but have increasingly emphasised downside risks to labour markets in their communications.

Australian labour market conditions are tighter than in most peer economies (Graph 2.4). Labour market conditions in Australia have continued to ease this year (see section 2.3 Labour market and wages). However, relative to pre-pandemic averages, the unemployment rate is lower and employment, participation, unit labour cost growth and job vacancies are all higher than in peer economies. That suggests domestic labour market conditions remain tighter than in those economies, consistent with monetary policy settings having been less restrictive in Australia (see Chapter 1: Financial Conditions).

US GDP growth has been surprisingly resilient but growth in some other advanced economies appears to have been a little weaker than previously expected.

US GDP growth remains robust and surprised to the upside relative to Consensus forecasts at the time of the August Statement, supported by favourable supply-side developments, including strong productivity growth. Quarter-on-quarter growth slowed slightly in the September quarter, although by less than previously expected. Household consumption growth remained resilient and increased in the September quarter. Upward revisions to US real household income growth and the savings rate for the June quarter suggest less downside risk to the US consumption outlook than previously thought.

Growth in other advanced economies has recovered somewhat from the very weak pace of 2023 but remains below estimates of potential growth rates, consistent with weak productivity growth in these economies (Graph 2.5). Activity in the September quarter now looks to have been a touch weaker than expected at the time of the August Statement. Euro area GDP picked up in the September quarter, in line with expectations in August, but September nowcasts for Canada and New Zealand have been revised lower. Consumption growth has remained soft relative to growth in real household disposable incomes in these economies, with households choosing to save more. In contrast to downward revisions elsewhere, the Consensus nowcast for UK September quarter GDP growth has been revised up, though it remains below trend growth. Several central banks have noted that continued weakness in productivity growth remains a key downside risk to the expected recovery in output growth, and an upside risk to inflation, especially if wages growth were to remain elevated.

Timely activity indicators suggest the recovery in advanced economy growth has slowed in the December quarter, but US conditions remain robust. Business conditions in the services sector remained expansionary in October: while conditions eased a little in the euro area and the United Kingdom, US conditions surprised to the upside. Manufacturing sector conditions remained contractionary in the United States and euro area, with conditions in Germany particularly weak. Conditions in New Zealand remain contractionary, despite some improvement since the middle of the year (Graph 2.6).

In China, recent economic growth outcomes have been weak and authorities have announced a large suite of stimulus measures to support growth.

Chinese GDP growth remained subdued in the September quarter, despite ticking up as domestic final demand rebounded after extreme weather in the June quarter. Net exports also made a significant contribution to growth (Graph 2.7). However, consumer sentiment remains weak, the real estate sector has continued to drag on growth and local government fiscal positions have worsened.

The Politburo took the unusual step of using its late-September meeting to discuss the outlook for the economy, and signalled a material step up in policy support (see Box B: Economic Policy Developments in China). This includes a package of monetary and fiscal measures, though the exact size and composition of the fiscal stimulus has yet to be announced. These announcements are expected to support growth over the next year and had an immediate impact on market sentiment, causing Chinese equity prices to increase sharply (see Chapter 1: Financial Conditions; Chapter 3: Outlook).

Iron ore, coking coal, steel and base metals prices have also increased following the announced Chinese stimulus package.

Iron ore prices have increased significantly since late September, driven by optimism around the outlook for steel demand in China following stimulus announcements. Iron ore prices have almost fully retraced declines in prior months. That recovery largely reflects improved market sentiment – underlying steel demand in China has declined recently, and global iron ore supply and portside inventories in China remain high. The stimulus announcements in China have also supported coking coal and base metals prices (Graph 2.8).

2.2 Domestic economic activity

Australian GDP growth remained subdued in the June quarter, as expected.

GDP growth was 0.2 per cent in the June quarter and 1.0 per cent over the year, in line with our expectations at the August Statement (Graph 2.9). However, the component-level results suggest there was a little less momentum in aggregate demand; household consumption was much weaker than expected, while the stronger-than-expected outcomes were in components that tend to be more volatile from quarter to quarter, including trade. We continue to assess that aggregate demand exceeded potential supply in the June quarter. Subdued GDP growth is helping to bring the economy back into balance, despite weak productivity outturns dragging on the estimated growth rate of supply (see section 2.4 Assessment of spare capacity).

Growth in private demand was weak over the year to June, while public demand continued to grow strongly. Private domestic demand increased by just 0.7 per cent over the year to the June quarter. Earlier large declines in real disposable incomes and restrictive financial conditions continued to weigh on household consumption. Dwelling investment remained weak amid subdued inflows of new construction projects and as capacity constraints in finishing trades continued to limit progress on the backlog of work. After strong growth in 2023, business investment declined over the first half of the year and growth in spending by tourists and international students slowed. The contrasting strength in public demand largely reflects the provision of government services to households, led by higher disability and aged care benefits, which has supported demand for labour in non-market sectors.

Household consumption growth was unexpectedly weak over the first half of the year; timely indicators suggest it has since picked up but by less than expected.

Real household disposable incomes have stabilised (following earlier falls) as inflation has declined and the pace of increase in interest and tax payments has slowed (Graph 2.10). Real incomes grew by 0.1 per cent in the June quarter, below our expectations in the August Statement. The implementation of the Stage 3 tax cuts is expected to have boosted real incomes by 1.3 percentage points in the September quarter, with bank account data already recording a lift in take-home pay.

Household net wealth has continued to increase steadily, which may be providing some support for consumption. Real household net wealth grew by 4.5 per cent over the year to the June quarter, and was 22 per cent higher than prior to the pandemic. This increase in household wealth has been largely driven by strong housing price growth. Households’ holdings of liquid assets, such as deposits, have also grown much more quickly than incomes over recent years. Increases in housing prices and share prices since the June quarter will have added further to wealth (see Chapter 1: Financial Conditions).

Household consumption growth was weaker than expected over the first half of the year. Household consumption declined by 0.2 per cent in the June quarter to be just 0.5 per cent higher over the year, driven by weakness in discretionary consumption – a noticeable slowing from the upwardly revised 0.6 per cent growth in the March quarter. This partly reflects the continuing effect of the weakness in real household incomes over recent years and, to a lesser extent, the unwinding of strength related to a number of large recreational and cultural events in the March quarter. Bank transaction data suggest that the weakness in household spending has been broadly based, including for households that own their home without a mortgage and those that rent. Strong growth in government consumption – which includes the provision of services to households – means that overall consumption growth has been more resilient; overall consumption growth nonetheless remains below its pre-pandemic average (Graph 2.11).

The growth rates of household consumption in prior years were revised higher in the recent Annual National Accounts release, primarily reflecting improvements in the measurement of digital services in the Australian economy. While the revision to growth in the most recent financial year was small, the level of consumption is now nearly 1 per cent higher than previously reported and is somewhat closer to its pre-pandemic trend.^[1]

Timely indicators suggest underlying household consumption growth has recovered in the September quarter but by a little less than previously expected. A range of indicators – including retail sales, bank transaction data and liaison – suggest that underlying consumption increased in the September quarter, though consumption per capita is expected to decline a little further (Graph 2.12). This is consistent with the small recent pick-up in consumer sentiment from very low levels. Business liaison contacts continue to report soft underlying trading conditions, although some household goods retailers have noted that an improvement during end-of-financial-year trading has been sustained.

Taking into account cost-of-living subsidies, measured household consumption is expected to be flat in the quarter (see Chapter 3: Outlook).

The household saving ratio has been relatively stable over recent quarters and has been below its pre-pandemic level on both a gross and net (of depreciation) basis over the past year. The extent to which households are willing to continue to save at this lower rate, particularly once real income growth starts to recover, is a key uncertainty in the outlook for household consumption (see Chapter 3: Outlook).

Growth in export volumes in the June quarter was stronger than expected.

Iron ore and education exports drove the stronger-than-expected quarterly outcome. Iron ore exports grew solidly as China continued to restock portside iron ore inventories. The stronger-than-expected increase in education exports reflected a rise in the average spend of international students onshore, which nonetheless remains below expectations from late 2023 (see Box D: Annual Review of the Forecasts). The number of international students onshore was little changed in the quarter. Partial data suggest that growth in resource and services exports has remained robust in the September quarter to date.

However, the tightening in student visa policy is beginning to weigh on international student arrivals. International student arrivals have begun to slow, as tighter visa processing standards have led to a decline in the proportion of student visa applications being granted. There are also signs that demand for student visas has decreased, likely in response to more stringent requirements for applicants (such as proof-of-savings and higher minimum English language requirements), although lodgements are still higher than pre-pandemic levels (Graph 2.13).

Business investment continued to grow but at a slower pace than in recent years, partly due to persistent construction cost pressures.

Growth in business investment slowed over the first half of the year following a period of rapid growth since late 2020 (Graph 2.14). Non-mining construction investment increased in the June quarter, driven by ongoing investment in renewable energy infrastructure projects and warehouses for data centres. Growth in non-mining machinery and equipment investment has slowed in year-ended terms. Firms in the RBA’s liaison program report that investment has been supported by demand for some types of light commercial vehicles and data centre fit-outs. Non-mining software investment has grown strongly, which liaison contacts attribute to firms investing in software platforms and a range of other digital services relating to data migration, cloud storage and cybersecurity.

Firms have moderated their nominal investment intentions for 2024/25 and investment is now expected to remain around similar levels to last year. That largely reflected a downward revision in firms’ expectations for construction investment, which is now anticipated to be flat in nominal terms over the next financial year rather than increasing. Expectations for non-mining machinery and equipment investment are little changed, with an easing in growth still expected, while mining investment is still projected to be relatively flat. Firms in liaison have cited postponements in major renewable energy projects and higher input costs (particularly for the construction sector) as drivers of the moderation in investment intentions, alongside the subdued outlook for private demand and broader macroeconomic uncertainty.

Advertised rents growth has slowed considerably and by more than expected, while housing price growth has been steady in recent months.

Growth in underlying demand for housing has slowed. Average household size has picked up this year, while population growth appears to have passed its peak and is weaker than was expected in the August Statement (Graph 2.15). The combination of these factors has contributed to the larger-than-expected slowing in advertised rents growth (see section 2.5 Inflation).

Dwelling investment was little changed in the June quarter and our assessment remains that dwelling supply is unlikely to pick up significantly in the near term. Labour shortages continue to constrain progress in working through the elevated backlog of residential construction work, although the subdued inflow of new work is helping to reduce the pipeline of projects. Detached approvals have trended up since mid-2023 but remain below average; liaison contacts report that uncertainty around whether interest rates have peaked continues to weigh on demand to build new housing. For higher density construction, high building costs continue to limit the viability of many projects.

Housing price growth was robust in the September quarter, with housing credit growth also picking up (see Chapter 1: Financial Conditions). There continues to be significant variation across states. Housing price growth remains particularly strong in Perth, Brisbane and Adelaide, while price rises have been more moderate in Sydney and regional areas and prices have declined in Melbourne. Growth remained stronger for lower value segments of the market.

2.3 Labour market and wages

Labour market conditions remain tight relative to full employment. While conditions have continued to move gradually towards better balance this year, the easing in some indicators has stalled recently and others have shown some signs of a tightening.

The labour market has continued to ease this year through a gradual increase in the unemployment rate, as strong growth in employment has only partially absorbed higher labour force participation. The unemployment rate was 4.1 per cent in the September quarter, in line with the August Statement forecast and 0.7 percentage points above its late-2022 trough. The participation rate and employment-to-population ratio were stronger than expected, increasing to record highs. With labour force participation increasing by a little more than employment, the gradual drift up in the unemployment rate reflects increasing labour supply outpacing still-solid growth in labour demand. The pace of increase in the unemployment rate has slowed recently; four of the past six-monthly outcomes have been at 4.1 per cent. The hours-based underutilisation rate has stabilised recently and is 0.8 percentage points above its late-2022 trough (Graph 2.16).

Participation rate outcomes have been strong. The increase since the start of the year has been observed across most demographic groups. The increased level of labour force participation may reflect some combination of cost-of-living pressures causing individuals to seek work and the continued availability of jobs (as measured by still-elevated vacancies), alongside longer run trends of greater female and older worker participation.

Employment growth has been stronger than expected at the time of the August Statement, consistent with labour demand remaining robust. The employment-to-population ratio increased further in the September quarter, having increased by more than in peer economies since the pandemic (see section 2.1 Global economic conditions). Given the subdued pace of economic activity, the recent strength in employment growth is consistent with ongoing weakness in measured productivity growth.

Growth in employment has been driven by the non-market sector – industries that are typically less sensitive to the business cycle, including health care and education. Information from liaison suggests labour demand remains strong in some sectors, such as health care, in which demand for services routinely exceeds supply. Survey and liaison measures of employment intentions, which tend to focus more on market sector industries, have eased in recent months and suggest that market sector employment growth will remain subdued in the near term (Graph 2.17).

Employment growth has remained strong alongside a decline in vacancies, supported by firms finding it somewhat easier to fill vacancies as the labour market has eased. Some firms in the liaison program have reported that they had been able to hire staff into longstanding vacancies that they were unable to fill when the labour market was tighter. The filling of pre-existing vacancies has likely contributed to the overall decline in the vacancy rate since mid-2022, though the vacancy rate remains above pre-pandemic levels. Our assessment is that further falls in vacancies can still occur alongside a relatively modest increase in the unemployment rate.

The rate of layoffs has increased modestly since 2022, alongside the gradual easing in labour market conditions, although it remains low by historical standards (Graph 2.18). Liaison information indicates that some firms have decided not to fill roles that had become vacant through natural attrition and turnover. In limited cases, some firms may have been discouraged from laying off workers due to expectations that economic conditions would improve in the period ahead and concerns around recruitment and training costs. However, this motivation is unlikely to be widespread as survey measures of capacity utilisation continue to be above average, an above-average share of firms still report that the availability of labour remains a constraint, and the vacancy rate and average hours look to be around or above their longer run trends.

The earlier easing in some labour market indicators has stalled recently, though other indicators continue to point to further gradual easing in labour market conditions. Average hours worked were a key margin of adjustment over 2023 but, looking through volatility, have not eased materially since late 2023. Similarly, the underemployment rate, which had been increasing since early 2023, was broadly unchanged in the year to mid-2024, and has declined recently. The youth unemployment rate, a more cyclical measure of unemployment, declined in the September quarter. Some leading indicators of labour demand, such as job advertisements, have also picked up in recent months.

Taken together, the various indicators suggest that the labour market remains tight relative to full employment, in contrast to most other advanced economies, but has continued to ease gradually (see section 2.4 Assessment of spare capacity).

Productivity growth remains weak, weighing on the growth of the economy’s supply capacity.

Non-farm labour productivity increased by 0.8 per cent over the year to the June quarter. Looking through pandemic-related volatility, labour productivity is now around the same level as in 2016. Over the past year, productivity growth has been supported by modest capital deepening, as the capital-to-labour ratio has been reverting towards pre-pandemic levels. Multifactor productivity, which is the part of labour productivity growth not due to changes in the capital-to-labour ratio, remains weak (Graph 2.19). Productivity outcomes have been weak in both market and non-market industries over the past year, albeit a little softer in non-market industries. Subdued productivity in the mining industry has notably weighed on market sector productivity growth over the past year.

Wages growth has continued to ease towards a more sustainable rate but remains high relative to recent productivity growth outcomes.

Growth in the Wage Price Index (WPI) eased further in the June quarter, to be 4.1 per cent over the year (Graph 2.20). The easing in wages growth since its 2023 peak has been broadly based, though the slowing in growth in the June quarter was more pronounced in the private sector.

At current rates of productivity growth, WPI growth remains somewhat above rates that can be sustained in the long term without putting upward pressure on inflation. All else equal, when productivity growth is positive, WPI growth is able to outpace inflation while still being consistent with inflation at the midpoint of the target range. As trend growth in labour productivity is likely below its rate in previous decades, the sustainable WPI growth rate is probably lower than in the past and below the current rate of growth. That suggests it would be difficult to sustain wages growth at its current pace in the longer term without a higher pace of trend productivity growth.

Unit labour cost growth continued to ease in the June quarter but remains higher than is consistent with inflation being sustainably at the midpoint of the target range.

Year-ended unit labour cost growth remains high but eased further in the June quarter (Graph 2.21). Unit labour costs, which are labour costs adjusted for labour productivity, grew by 5¼ per cent over the year to June, well above their historical average pace and faster than is consistent with inflation being sustainably at the midpoint of the target range. In year-ended terms, unit labour cost growth has slowed since its peak in 2023, as productivity growth has increased while labour cost growth remains elevated. The six-month annualised growth rate was 3½ per cent in the June quarter, down from 7 per cent in the December quarter of 2023. A further easing in the growth rate of labour costs, or an increase in productivity growth, will be needed to bring unit labour costs growth to around its sustainable level.

2.4 Assessment of spare capacity

Our overall assessment is that there continues to be excess demand in the economy, but that it has moved closer to balance.

A range of information – including underlying inflationary pressures – continues to suggest the labour market is tight and aggregate demand remains above the economy’s capacity to sustainably supply goods and services. However, taken together, developments since the August Statement suggest the economy has continued to move gradually towards balance. Subdued output growth has resulted in a narrowing of the gap between actual output and estimates of potential output. Labour market conditions have continued to ease gradually, though the earlier easing in some indicators has stalled recently. The evolution of the output gap and labour market spare capacity is broadly consistent with expectations at the time of the August Statement.

Labour market and capacity utilisation indicators suggest economic conditions remain tight.

Although labour market conditions have eased since late 2022, a range of indicators suggest the labour market remains tight. These include the hours-based underutilisation rate, the vacancies-to-unemployment ratio, and the share of firms reporting the availability of labour as a significant constraint. Some leading indicators such as employment intentions have continued to ease, which has flowed through to subdued employment growth in the market sector. However, the effect of this weakness on the level of labour underutilisation has been mitigated by strong employment growth in the non-market sector, so that overall labour market conditions have eased only gradually (Graph 2.22).

Indicators of capacity utilisation suggest some resources continue to be used intensively. The NAB survey measure of capacity utilisation remains elevated and is broadly unchanged from the August Statement, having stabilised above its historical average. This suggests businesses are still using their labour and capital resources at higher-than-normal rates to meet demand. However, liaison indicates that conditions vary across sectors. Rental vacancies data show the housing stock continues to be utilised intensively, consistent with subdued growth in housing supply over recent years, contributing to high CPI rent inflation (Graph 2.23).

Estimates of the gaps between demand and supply in the economy are somewhat closer to balance than in August.

Model-based estimates suggest that the labour market remains tighter than full employment, consistent with elevated wages growth and inflation. Both the unemployment rate and the broader hours-based underutilisation rate remain lower than their estimated full-employment levels, resulting in negative unemployment and underutilisation gaps (Graph 2.24). These gaps have narrowed over the past year, suggesting the labour market is gradually moving towards full employment. Estimates of the gaps for the June quarter are broadly consistent with the assessment in the August Statement. There is substantial uncertainty surrounding estimates of full employment, although each of the model estimates in the suite that we consider implies that the labour market is tighter than full employment.

A range of model-based estimates suggest the output gap is positive but continues to narrow (Graph 2.25). Recent outcomes for actual output remain higher than estimates of potential output, suggesting aggregate demand continues to exceed the capacity of the economy to sustainably produce goods and services. However, estimates indicate the output gap continued to narrow in the June quarter, reflecting subdued growth in output relative to potential. This narrowing was broadly as expected in the August Statement. The range of model estimates for the output gap remains wide, reflecting differences in how individual models interpret the data. Over and above this, each individual model estimate comes with its own range of statistical uncertainty. Therefore, the range of plausible estimates of the output gap is wider than that indicated by the range of model estimates shown in Graph 2.25.

2.5 Inflation

Underlying inflation remains above the target range but is slowing as expected.

Underlying inflation eased in the September quarter in year-ended terms, though in quarterly terms the pace of decline has been gradual since mid-2023. Trimmed mean inflation eased to 0.8 per cent in the September quarter and was 3.5 per cent in year-ended terms, down from 4.0 per cent in the June quarter (Graph 2.26). These outcomes were broadly as expected in recent Statements. The recent slow pace of quarterly disinflation is consistent with the assessment that the labour market remains tight and that aggregate demand exceeds supply, though these gaps have been closing.

Headline inflation has fallen sharply due to federal and state government electricity rebates and declining fuel prices. Headline CPI increased by just 0.1 per cent (seasonally adjusted) in the September quarter, its smallest increase since June 2020 (Graph 2.27). The introduction of new state and federal government electricity rebates and a decline in fuel prices were the main drivers of the low growth rate, subtracting 0.7 percentage points from quarterly inflation in September. In year-ended terms, headline inflation eased to 2.8 per cent in September, down from 3.8 per cent in June. Nonetheless, year-ended headline inflation is expected to increase in the September quarter of 2025 to above the target band as the rebates unwind (as currently legislated).

Year-ended services inflation eased further, though from a high level.

Market services inflation eased over the year to the September quarter (Graph 2.28). Market services inflation was 1.0 per cent in the September quarter and 4.6 per cent over the year, down from 5.3 per cent (excluding domestic travel and telecommunications). The easing in year-ended inflation was broadly based across most market services. Market services inflation, which remains above its historical average, picked up in quarterly terms, driven by increases in inflation for household services, and meals out and takeaway. These outcomes are consistent with the still-significant pace of growth in domestic non-labour costs and in unit labour costs. Survey measures, including in the RBA’s liaison program, suggest that services firms are continuing to pass at least some of this cost growth through to prices, and expect prices growth to ease only modestly over the year ahead.

CPI rent inflation remains high but has eased a little, reflecting the gradual pass-through of the slowing in advertised rents. Rent inflation – for the stock of rental accommodation captured in the CPI, which excludes regional areas – was 1.6 per cent in the September quarter and 6.7 per cent over the year, down from 7.3 per cent. The easing in CPI rent inflation has followed a faster-than-expected slowing in advertised rents growth. This reflects slowing growth in demand for housing through an increase in average household size, possibly due to affordability constraints, and slowing population growth. The federal government’s 10 per cent increase to Commonwealth Rent Assistance in September has weighed on CPI rent inflation slightly and will also contribute to an easing in the December quarter. CPI rents are expected to ease further over the coming year as the recent slowing in advertised rents growth flows gradually through to CPI rents as leases are updated (Graph 2.29).

Inflation for goods and services with administered prices (excluding utilities) increased over the year to the September quarter. Administered prices are those that are (at least partly) regulated or relate to items for which the public sector is a significant provider. The recent increase in year-ended inflation largely reflected the 2023 changes to the Child Care Subsidy no longer having an effect (Graph 2.30). The earlier strong pace of headline inflation continues to place some upward pressure on year-ended administered price inflation, as some administered prices are indexed to lagged CPI.

Goods inflation has eased further.

The pace of retail goods inflation eased a little further in the September quarter. Prices of many household goods have continued to decline in year-ended terms, consistent with some retail firms in liaison reporting they are less able to pass on cost increases to prices given current demand conditions. Consumer durables inflation was stable at around zero in the year to the September quarter, with the earlier easing in price inflation of imported consumption goods having largely flowed through to domestic prices. Groceries inflation (excluding fruit and vegetables) declined a little further and remains around the average level seen over the past decade (Graph 2.31). Global container shipping costs have eased since their July peak, though the cost of shipping a container from China to Australia remains elevated. Shipping costs continue to pose some upside risk to the outlook for domestic retail inflation.

New dwelling cost growth has stabilised at above its pre-pandemic rate. Labour costs continue to contribute to ongoing cost growth, partly driven by the large pipeline of construction work and ongoing labour shortages for certain trades. Outcomes have varied across capital cities. Year-ended new dwelling cost inflation has returned to around its pre-pandemic average in Sydney, Brisbane and Hobart. By contrast, new dwelling cost inflation in Perth has increased further in year-ended terms, consistent with high demand for new homes and increases in labour costs (Graph 2.32).

Inflation expectations remain consistent with achieving the inflation target over time.

Survey and financial market measures of short-term inflation expectations have declined from their mid-2022 peaks, consistent with declines in actual inflation. Financial market measures of inflation compensation have declined to be close to survey measures of medium- and long-term expectations. Our assessment is that long-term inflation expectations remain anchored at the target (Graph 2.33).

Endnote

The 2023/24 Annual National Accounts contain the most recent data on GDP. The earlier June quarter 2024 National Accounts contain the most recent data on quarterly movements in GDP. [1]