Inflation pressures remain entrenched, CreditorWatch warns

CreditorWatch Chief Economist Ivan Colhoun has warned that inflation pressures in Australia remain entrenched despite a softer-than-expected April consumer price reading. He also cautioned that the Fair Work Commission's 4.75% minimum wage decision will add to business cost pressures and complicate the Reserve Bank of Australia's policy task.

In a brief on the April trimmed mean consumer price index, Colhoun said the data did not mark a clear turning point in price dynamics. The trimmed mean rose 0.307% month on month and 3.4% year on year, in line with the median forecast but slightly below some market expectations.

He argued that broad-based pass-through from higher costs had yet to show up in the data, though pressures were building. NAB's April business survey showed input costs rising about 4.5%, outpacing selling prices and squeezing margins for many firms.

That points to a likely increase in pass-through to consumer prices in coming months. Colhoun expects clearer evidence in the May CPI figures, particularly in categories already showing signs of strain.

Prices for newly constructed dwellings rose 0.7% in April. The Australian Bureau of Statistics attributed the increase to higher prices and fuel surcharges.

Clothing and footwear prices rose 1.1% over the month, while household goods and furnishings increased 0.4%. Colhoun noted that freight costs strongly influence both categories.

By contrast, food prices rose just 0.1% month on month. Supermarket suppliers have reported greater resistance to price increases than in the post-COVID period, which he sees as one factor limiting the current inflation response.

He described the release as difficult to interpret because it ran slightly counter to recent RBA staff research suggesting rapid price pass-through would re-emerge. Interest rates and cost-of-living pressures are already placing stronger constraints on household demand than in the early post-pandemic phase, he said.

Oil prices are central to his outlook. Colhoun said the energy shock stemming from conflict in the Middle East is feeding through business cost structures and could prolong elevated prices if it persists.

He added that current peace negotiations in the region appear constructive and could help normalise oil prices. That would likely unwind much of the recent inflation impulse and ease pressure on households and businesses.

Colhoun also highlighted the persistent breadth of inflation across the CPI basket. Too many items are still recording annual price rises above 4%, he said, which is inconsistent with a sustained return to the RBA's 2.5% target.

Separate CreditorWatch analysis of the Fair Work Commission's minimum wage ruling points to fresh cost pressures from July. The Commission granted a 4.75% increase in modern award wages, well above last year's 3.5% decision and higher than market forecasts.

The rise applies to about 2.8 million employees, or 21.1% of the workforce. Because many of these workers are part-time, casual, and lower paid, the increase covers only 11.2% of the national wage bill.

Colhoun said this limits the macroeconomic impact. Even so, the effect on individual employers in labour-intensive industries will be significant.

Retail, hospitality, healthcare and social assistance, and administrative and support services account for more than two-thirds of the workers affected by the ruling. Businesses in these sectors are already dealing with higher energy costs and elevated interest rates, he said.

The Commission framed its decision around its statutory obligations on fair minimum wages, competitiveness, and gender equality. It also cited the need to address the real wage erosion low-paid workers have experienced since the post-pandemic inflation surge.

The Commission noted that a wage increase "well over 5%" would have been needed to fully restore purchasing power for the lowest paid, based on the RBA's forecast of 4.8% headline inflation over the next year. It concluded that such a move would not be responsible in the current environment and instead chose a lower increase that leaves minimum wage earners no worse off than at the end of last year.

Colhoun warned that setting wage growth at 4.75%, close to forecast headline inflation and well above the 2.5% target, risks entrenching higher inflation expectations. The RBA board monitors those expectations closely each month.

He also raised concerns that wage, fiscal, and monetary settings appear misaligned. In his view, the wage ruling will make the RBA's disinflation task "somewhat more difficult" and could require a longer period of restrictive interest rates.

"While the larger-than-expected minimum wage increase will be welcome for the lowest paid, many businesses and the RBA are unlikely to be as happy. The rise will add to business costs at a time of already elevated inflation, higher interest rates and at least a temporary surge in fuel costs. Four sectors account for over two-thirds of this employment: retail, hospitality, healthcare and social assistance, and administrative and support services. And by delivering a rise much higher than the RBA's 2.5% inflation target, the decision may well contribute to raising inflation expectations more broadly. At the margin, it makes it a little harder for the RBA to return inflation to 2.5% and gives the impression the different arms of economic policy are working at crossed purposes," said Ivan Colhoun, Chief Economist, CreditorWatch.