The RBA is using interest rates as almost their sole instrument in controlling inflation. Their guidelines as to where they would like inflation is between 2% and 3%. When inflation moves outside of that bracket, the RBA will adjust interest rates to direct inflation back between that bracket. Interest rates as an instrument to move inflation is not a really effective tool.
The issue with it is that it only makes things harder for those that have a loan. It is a tool that is trying to adjust peoples spending habits. This means that people that own homes with debt suffer much more than those who rent. For a high paid person that rents, interest rate increases have almost no impact on their life or spending habits. So, this part of the community is still able to spend and increase inflation while home owners are forced to suffer.
Further problems are incurred because inflation is also driven by the lack of supply of labour which pushes costs of services up. Heavy government handouts and overspending on things like NDIS also serve to drive inflation up. So, on one hand the government wants inflation to decrease yet, they are fuelling it with the other hand. It doesn’t really make sense.
Despite all of this, as property investors, it is important to monitor inflation because that will be a very good indicator of interest rates which directly affect us.
The forecast for inflation for this year is that it should be sitting outside of its guidelines at 3.8%. If this was to increase, we may be in for an interest rate rise. On the contrary, if it was to drop, which it is anticipated to drop to 3.2% by June 2025 then it is likely rates will come down. It is a position that us as property investors need to keep a close eye on as the RBA is doing.