Rising inflation reaches 4.0% prompting concerns from the Reserve Bank of Australia

What is the impact on long-term investment strategies & where can we find the next set of opportunities?

RBA Meeting Insights: Inflation, Cash Rates, and Economic Outlook

During the recent Reserve Bank of Australia (RBA) meeting, several key points were discussed:

CPI Impact:

• The RBA considered the impact of federal and state budgets on current Consumer Price Index (CPI) levels.
• Global economic cues were also taken into account, particularly those driving stronger domestic demand and alleviating financial pressures on large businesses.

Inflation Risk Assessment:

• The current CPI data indicates an increased risk of achieving the forecasted inflation targets.
• Consequently, the path to returning inflation to target levels by 2026 may be slower than initially expected.

Cash Rate Decision:

• Despite these concerns, the RBA decided to maintain the cash rates at 4.35%.
• The reasons for this decision are attributed to the following factors:

Long-Term Outlook:

• From a broader perspective, the economy aligns with the goal of inflation returning to its target by 2026.

Monitoring and Flexibility:

• While the RBA currently maintains unchanged cash rates, they closely monitor global and domestic indicators.
• The central bank remains open to adjusting rates significantly to maintain healthy inflation levels and track the original 2026 target.

Comparative Analysis of CPI Levels:

In a comparative analysis of CPI levels, the Monthly Consumer Price Index (CPI) for May rose to 4.0% from the previous 3.6% in April 2024

The largest contributions to the CPI index were from housing (+5.2%), food and non-alcoholic beverages (+3.3%), transport (+4.9%), and alcohol and tobacco (+6.7%)

Source: ABS - Monthly CPI Indicator The monthly CPI data highlights robust demand in the housing sector, driven by increasing prices for both new dwellings and rental properties.

Additionally, the recently announced tax rate cuts (effective from July 1) and modifications to the Home Guarantee Scheme (HGS), which now includes nearly 50,000 additional eligible properties, are expected to further boost property prices. This influx of first-home buyers entering the market contributes to the upward trend.

While rental prices decreased from the levels of 7.5% in April 2024, they remained higher than the levels observed in May 2023, which stood at 6.3%

Source: ABS, Monthly CPI Data

This situation directly indicates a tightening in rental markets, accompanied by a consistent surge in demand for rental properties.

Furthermore, CoreLogic’s recent market mapping report emphasizes a substantial rise in demand for properties priced at mid and affordable levels, surpassing the demand for premium properties.

Geographical charts clearly illustrate the movement of housing prices across different price segments. For investors seeking long-term capital gains in the residential housing market, this trend holds significant implications.

Median Value of Houses in Melbourne

Source: Corelogic - Market Mapping Report

12-Month Value Change

Source: Corelogic - Market Mapping Report

Key Takeaways and Way ahead:

RBA’s Cash Rate Stand:

• The Reserve Bank of Australia (RBA) maintains the current cash rate at 4.35%.

Affordability Boost for First Home Buyers:

• The Home Guarantee Scheme (HGS) and recent additions of eligible properties enhance affordability for first-time buyers.

Tax Rate Cuts and Energy Bill Rebates:

• The upcoming tax rate cuts (effective from July 1) and energy bill rebates increase disposable income for Australian households.

Investment Opportunities in Housing:

• Investors should explore opportunities in the affordable and mid-priced housing segment, which is likely to yield higher returns.

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