Australia's inflation rate at highest level in two decades

A shopper places produce in a bag at Melbourne's Victoria Market, on July 5, 2022. PHOTO: AFP

SYDNEY - Inflation in Australia has soared to its highest level in two decades, prompting a warning from the federal government that the "confronting" rise in prices could lead to job losses and slower growth.

Data released on Wednesday (July 27) by the Australian Bureau of Statistics showed that the annual inflation rate to the end of June was 6.1 per cent, up from 5.1 per cent in the year to March.

The rate is the highest since 2001, when prices had a sudden jolt due to the introduction of a goods and services tax. It is expected to reach 7 per cent by the year end.

The rise in inflation presents serious challenges to the Labor government, which was elected in May with a promise to address cost-of-living pressures. The government will find it difficult to provide relief to struggling households while also avoiding adding to the mounting debt.

Treasurer Jim Chalmers said that the outlook will "get tougher before it gets easier". He told reporters: "A lot of people are living pay cheque to pay cheque."

The high inflation has been spurred by Russia's invasion of Ukraine and supply chain problems due to the pandemic, which have led to soaring prices of fuel and groceries.

Australia's economy remains relatively strong and it is enjoying an unemployment rate of 3.5 per cent - the lowest in almost 50 years. But the new data has added to the likelihood that its central bank, the Reserve Bank, will lift the interest rate when it meets on Tuesday.

Since May, the bank has increased the rate from its record low of 0.1 per cent to 1.35 per cent, though analysts expect it to reach more than 3 per cent by the end of the year.

Australia's economy is particularly vulnerable to rising interest rates because its households are among the most indebted in the world. This is due to a spectacular property boom in the past two decades that has forced buyers to take on increasingly large mortgages.

In Sydney, the average home price is A$1.245 million (S$1.2 million), up from A$365,000 in 2002, based on the latest official data.

Until the pandemic, Australia had enjoyed a world-beating 28 years of consecutive growth, aided by China's thirst for Australian resources.

But the outlook has weakened, particularly as China's slowdown and Canberra's frosty ties with Beijing raise concerns that the nation's economy cannot depend on booming trade with China.

Dr Chalmers said the global economy was on a "precarious and perilous path", which was dimming the prospects for Australia.

"Clearly, if the impact of rising interest rates and slowing global growth is a downgrade to our expectations for growth here, that will have an impact on the unemployment rate," he said.

Australia's labour shortage, which has been exacerbated by a struggle to attract foreign workers during the pandemic, has not led to significant wage growth, making it difficult for households to deal with rising prices.

Prime Minister Anthony Albanese has been criticised for urging the Reserve Bank not to "overreach" as it increases interest rates.

Prominent economics commentator Ross Gittins said Mr Albanese should have avoided making the comment, even though the sentiment that the Reserve Bank should show restraint was correct.

"Increasing interest rates - which all the rich countries' central banks are doing - can do nothing to end supply disruptions caused by the pandemic, end the Ukraine war or stop climate change," he wrote in The Sydney Morning Herald.

"All higher rates can do is reduce households' ability to spend."

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