Budget predictions show inflation to return to target soon

Australians could soon breathe a sigh of relief as federal budget forecasts reveal inflation may temper a year earlier than previously predicted.

Treasury predictions in the budget, which will be handed down on Tuesday, show inflation dropping to 2.75% by December.

The forecasts also show inflation remaining at 2.75% by the middle of 2025, before a further drop to 2.5% by the end of that year.

The modelling in the budget shows inflation falling back to within the Reserve Bank of Australia’s (RBA) target range of two to three percent, almost one year earlier than the bank had forecast at its May meeting.

Finance Minister Katy Gallagher says this shows the budget has made progress on inflation, but would continue focusing on alleviating cost of living pressures and future economic growth.

“The job isn’t done yet,” she told the ABC on Monday.

“We’re very mindful of the economic circumstances that we’re operating in at the moment — there’s challenges but opportunities in that as well.”

Unemployment, for example, is expected to rise from 3.8% to 4.5% over the next 12 months.

“That’s been the discussion about the narrow path — how do you moderate inflation without smashing the economy?” Gallagher said.

Inflation, which stands at 3.6% for the year to the March quarter, was moderating faster than Treasury previously expected, Treasurer Jim Chalmers said.

“The budget will put downward pressure on inflation, not upward pressure on inflation. Our budget will be part of the solution to the cost of living pressures, not part of the problem,” he said.

Opposition finance spokesperson Jane Hume noted this was a more optimistic outlook than other economists had predicted.

“It’s certainly very different from the RBA forecast that was made only six days ago,” she told ABC radio.

“I suppose it’s really up to the treasurer now to tell us exactly how the government is going to bring inflation back down sooner.”

The difference between the Reserve Bank and Treasury’s forecasts were to be expected, Gallagher said, as the government’s predictions considered decisions made in the budget.

“Obviously, that wasn’t available to the RBA, so I don’t think there’s any surprise that there’s a bit of a difference,” she said.

Treasury had predicted in December’s mid-year budget update an inflation figure of 3.75% to the year to June 2024.

Dr Chalmers’ third budget as treasurer is also set to show a softer outlook for growth in the years ahead, with GDP downgraded.

Real GDP growth is set to be 2% in 2024/25 and 2.25% in 2025/26, both being 0.25% lower than previous Treasury forecasts.

While the forecasts show lower estimates for inflation, the budget papers say that there remains “considerable uncertainty around the outlook for the domestic and global economy”.

“Inflation is still the big near-term challenge in our economy, which is why the government is doing its bit in the budget,” Dr Chalmers said.

This article was first published by AAP.

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