(Bloomberg) -- Australia’s center-left government will be breathing a sigh of relief after the latest inflation data all-but ruled out another interest-rate hike, though experts say cost pressures are dissipating too slowly for an early election.
Prime Minister Anthony Albanese must hold a ballot by May 2025 and some ruling Labor party lawmakers had hoped easing consumer prices and rate cuts in coming months would set the stage for a possible December vote. First-term governments in Australia have historically called early elections to try and capitalize on good polling or an improving economy.
But inflation has proved sticky in the first half of 2024 and that means the Reserve Bank is likely to keep rates at the current 12-year high of 4.35% for longer.
“It’s still not good enough for the RBA to consider cuts,” RSM Australia Economist Devika Shivadekar said. The data “doesn’t do much for the government either in terms of boosting confidence.”
Cost of living pressures have been at the center of the Labor government’s economic challenges during its time in office, with a post-pandemic surge in consumer prices coinciding with the Albanese government’s election in May 2022. The RBA raised rates 13 times between that month and November 2023 as it tried to regain control over inflation.
Yet the biggest contributor to CPI last quarter was housing as a shortage of dwellings and a jump in immigration has sent accommodation costs soaring. This was predominantly driven by rental price growth, up 7.1% over the year, while the price of new dwellings jumped 5.4%.
“Inflation will remain too high if we don’t get a circuit breaker from government to facilitate the building of more homes,” said Denita Wawn, chief executive of Masters Builders Australia Ltd., the peak body for the construction industry. “The housing shortage makes it difficult to contain inflation.”
Housing supply falls outside the scope of monetary policy, with only the government and market forces able to resolve it. Labor has pledged a major construction program but there’s no quick fix.
Labor does have a good economic story to tell in other respects: unemployment is low, it has posted back-to-back budget surpluses and tax cuts took effect on July 1. Still, headline inflation at 3.8% is well above the RBA’s target and the government would like mortgage relief for the electorate to bolster its standing.
While the government has an edge over the center-right opposition in most opinion polls, surveys also show Australians are frustrated with its handling of the economy.
Shadow Treasurer Angus Taylor, who has led the Liberal-National coalition’s attacks on Labor’s performance, said it’s hard to see inflation becoming less of an issue ahead of the next election, no matter when it is held.
“When inflation is raging, there are few other issues that match it,” he said in an interview.
Experience overseas suggests that while inflation jumps around, it can also dissipate quite quickly. After Wednesday’s better-than-expected CPI, money markets shifted to price about a two-in-three chance of an RBA rate cut in December and they’re fully pricing one for February.
“The government would certainly welcome election timing and interest rate cut timing coinciding if it could manage it,” said Alex Joiner, chief economist at IFM Investors, one of the nation’s biggest asset managers. “But that means it will need to call the election as late as possible based on the economic outlook.”
In the event Albanese did go to the polls before year’s end, few lawmakers or experts believe he would consider doing so until after the Queensland election on Oct. 26, when the state Labor government is expected to lose office. That leaves a narrow window for a Dec. 7 or Dec. 14 national vote. Otherwise, it’s 2025.
Mark Kenny at the Australian National University said the government may have misjudged the timetable for bringing inflation under control.
“It has made it quite difficult to marry the political and the economic to bring them into the kind of sync that governments like to, in order to get through electoral tests,” said Kenny, who is director of the Australian Studies Institute. “The government wouldn’t choose to be in the position that it’s in.”
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