Australian service sector inflation spikes amid high demand and tight supply

SYDNEY – Michele Bullock, speaking at the Australian Business Economists Annual Dinner on Wednesday, highlighted the burgeoning costs within Australia’s service sector. She specifically noted areas such as personal care and recreation where spending has surged, driving up inflation. Bullock identified a combination of strong domestic demand outpacing supply and rising costs for labor and other domestic inputs as key contributors to this trend.

In contrast to the supply-side inflation driven by COVID-19 disruptions and geopolitical events that previously dominated goods prices, Bullock projected a gradual return to inflation levels below 3% over the next two years. This forecast follows a decrease from an initial peak of 8% to the current rate of 5.5%.

Backing the Reserve Bank of Australia’s (RBA) series of aggressive interest rate hikes since May last year, Bullock at the ASIC Annual Forum declared continued support for further increases if necessary.

The conversation around inflation took a political turn when Prime Minister Anthony Albanese, speaking in Ryde Thursday, attributed the inflationary pressures to global factors rather than domestic issues. He pointed out that an aggressive immigration policy during the 2022-23 financial year led to an influx of 500,000 net migrants, which has significantly increased aggregate demand. This surge has put additional pressure on the RBA’s ability to control economic stability through interest rate adjustments.

The impact of these dynamics is most evident in the housing market, where rent spikes within the Consumer Price Index (CPI) basket have underscored an acute mismatch between demand and supply. The situation is particularly challenging for Australian renters, who are bearing the brunt of these pressures.

Critics have responded to these developments by calling on Albanese’s government to implement an immediate freeze on immigration. Such a measure is proposed as a way to alleviate inflationary pressures and prevent further financial hardship for mortgage holders and renters across Australia.

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