The Reserve Bank of Australia (RBA) has underscored that stronger-than-expected population growth is playing a significant role in bolstering business pricing power while simultaneously restraining wages growth.
In its latest statement on monetary policy, the RBA provides updated economic forecasts that shed light on its Cup Day decision to raise interest rates.
CPI accelerated
The RBA has revised its short-term inflation forecasts significantly upward in response to the most recent Consumer Price Index (CPI) data, which indicated an acceleration in inflation during the September quarter.
The bank now expects both headline and trimmed mean inflation to remain at 4.5% for the year ending December, a 0.6 percentage point increase from its previous core measure.
Furthermore, the bank anticipates that inflation will stay near 4% until the middle of the following year before gradually declining to just below the top of its 2-3% target range by the end of 2025.
Despite a record 2.8% annual growth in the working-age population, the RBA has downgraded household consumption forecasts. It attributes this adjustment to the dynamics of persistent inflation and its impact on different sections of society.
Population growth feeds demand
The bank observed that stronger-than-expected population growth has contributed to output growth this year, easing supply constraints, and supporting business investment and public demand. But it also noted that population growth has not substantially affected aggregate wages growth.
While the increase in population has helped alleviate labour shortages in specific sectors, it has not materially impacted overall wages growth.
Instead, it has boosted demand conditions for businesses, particularly in sectors such as international education and tourism. This increase in demand has a direct influence on the pricing behaviour of consumer-facing firms.
The surge in population has led to record-low rental vacancy rates and steep rent increases. Although population growth dampens inflation by ensuring adequate supply, it also reduces the need for employers to bid up labour costs.
Consequently, despite stubbornly high inflation, the RBA expects real household disposable income to decline significantly until the second half of the following year.