Perth inflation at pre-GFC high

Prices are growing faster in Perth than any other capital city. But should we be concerned?

Perth prices rose 1.9 per cent over the quarter to June 2021, according to the latest consumer price index figures from the Australian Bureau of Statistics (ABS).

This is the highest rate of prices growth during the past quarter of any state or territory, pushing Perth’s annual CPI growth to 4.2 per cent for the year to June. We haven’t seen annual inflation this high since before the start of the GFC in September 2008.

Perth’s consumers are facing higher prices for petrol (up 7.3 per cent over the quarter), housing (+6.5 per cent), beef (+3.8 per cent), fruit (+2.4 per cent) and vegetables (+3.2 per cent).

So, what’s driving the growth in prices, and should we be concerned that inflation is set to stay?

Consumer confidence in Western Australia has remained high, no doubt aided by the McGowan government’s strong response to the COVID-19 pandemic.

And there’s little doubt the stimulus measures and supports put in place by state and federal governments have bolstered consumer demand.

But there are also several specific, or temporary, factors at play, especially when we look at housing, utilities, and fresh food costs.

Electricity prices have nearly doubled over the quarter, but this is because many WA families have exhausted their $600 household electricity credit.

Housing stimulus packages and low interest rates have massively increased the demand for new home purchases, with the cost of new dwellings rising 8.9 per cent over the year to June.

But the residential construction industry is facing challenges on the supply side in meeting this rising demand.

Limited supplies of construction materials and a shortage of skilled construction workers have played a significant role in driving up Perth’s house prices.

House prices do appear to have settled during the past quarter, however, with some of the heat being taken out of the market as the Building Bonus and HomeBuilder grant schemes come to an end.

Rental affordability remains one of the biggest concerns, with Perth rents rising 2.6 per cent over the June 2021 quarter.

High demand for rentals is clashing with historically low rental vacancy rates to push rents ever higher. New dwelling construction won’t add significantly to the rental stock for at least the next year, so we don’t expect the pressure on rents to ease any time soon.

National CPI growth is up 3.8 per cent over the year, which takes us outside the RBA’s target band of 2-3 per cent.

Despite this, Reserve Bank of Australia governor Philip Lowe doesn’t seem too concerned by the latest inflation figures, which suggests he believes the recent price hikes are temporary in nature.

Dr Lowe has signalled clearly that cash rates will not be increased until actual inflation is sustainably within the 2 to 3 per cent target range.

And the RBA has emphasised that it does not foresee this condition being met before at least 2023.

The RBA will want to ensure that the recovery stage of the economy is well supported, with a particular eye on a return to full employment.

And let’s not forget wages.

We’ve seen very little in the way of wages growth over the past few years, and this will create more of a challenge to economic growth as stimulus measures continue to be withdrawn.

However, labour shortages are likely to increase the bargaining power of workers, and this may lead to a return to wages growth over the coming year.

• Daniel Kiely is a senior research fellow, Bankwest Curtin Economics Centre