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Investing.com - The Reserve Bank has unveiled its latest economic projections for the upcoming years, revealing that unexpected population growth simultaneously enhances business pricing ability while suppressing wage growth.
The RBA estimates inflation will remain at 4.5% till the end of this year and won't drop under 3% till late 2025.
The bank forecast that real household disposable income will persist in falling till the latter half of next year.
Despite the record 2.8% annual growth in the working-age population, household consumption forecasts got downgraded by the bank.
As was predicted, the bank significantly increased its short-term inflation predictions in response to recent Consumer Price Index data from the ABS, demonstrating an acceleration in inflation during the September quarter.
The bank expects both headline and trimmed mean inflation to hit 4.5% for the year ending in December, which is a hike of 0.6 percentage points for its preferred measure. It also anticipates inflation staying close to 4% mid-next year before gradually sliding to just below its 2-3% target range by the end of 2025.
Tom Kennedy, JPMorgan Chase&Co (NYSE:JPM) economist, states that the significant upgrades to the bank’s predictions were largely anticipated by the market.
The dynamics of this stubborn inflation and how it impacts distinct economic segments provide intriguing insights.
Stronger-than-expected growth in population coupled with an increase in private and public investments have fostered more robust output growth this year.
Rapid population growth impacts inflation but not as much as one might expect. It has, however, helped alleviate inadequacies in the labor force in sectors like hospitality.
The working-age population in Australia experienced a year-to-year peak growth rate of 2.8% as of September. This growth rate is historically significant, marking the most robust growth rate since records began in February 1979.
The surge witnessed in population growth is a significant part of the narrative for record-low rental vacancy rates and the steepest rent increases in decades.
By ensuring an ample supply of goods and services to meet demand, the population boost to the supply side mutes inflation. It also curtails the necessity for employers to further bid up wages if workforce availability were limited.
The Reserve Bank also noted that annual wage growth in the private sector has topped at about 4%, resulting in slight downgrades to its Wage Price Index projections and more significant reductions in both the average outcomes and near-term predictions for average earnings per hour.
Due to the coexistence of relentless, high inflation and relatively weak income growth, the RBA now expects real household disposable income—a prime index of living standards—to continue its sharp decline until the second half of the coming year.
Consequently, while the overall business sector appears in a decent position, it appears that households within the working-age bracket will continue to bear the burden in containing inflation through higher interest payments, reductions in individual consumption, and sustained declines in real wages, at least until mid-next year.
