Australia unleashes rent and energy relief as inflation bites voters

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Australian chocolatier Yasmin Coe is feeling the pinch of higher inflation, and is not convinced that government efforts aimed at cutting the cost of living will turn fortunes around.

Coe, the 39-year-old co-founder of Sweet Pea and Poppy in Murrumbateman, New South Wales, said her business, which has a staff of nine, was recording lower sales but facing rising cocoa prices. Tourism to the Southern Tablelands region, which draws visitors seeking cooler climates, has also fallen, she said. 

“People are really having to control their budgets,” Coe said. “For the first time, we are seeing that.”

A cost of living crisis has divided Australia between renters and borrowers on one hand — who have been hit by rising bills for energy, food, mortgages and rents — and homeowners, who tend to be older, on the other.

Treasurer Jim Chalmers sought to offer some relief last week in a budget that included almost A$8bn (US$5.3bn) in energy rebates and rent assistance. The subsidies came on top of long-promised tax cuts, as the centre-left Labor government tries to boost lower- and middle-income Australians ahead of an election next year.

“The number one priority of this government and this budget is helping Australians with the cost of living,” Chalmers said in his budget speech, claiming it delivered “responsible relief that eases pressure on people and directly reduces inflation”.

But while the cost of living subsidies will mechanically push down on the inflation index, some economists argue that pumping extra stimulus into the economy in the form of A$300 one-off energy rebates — which are not means tested, and so will be handed to everyone — will fuel price rises overall.

“That money is not going to be saved. It will be spent by households,” said Carlos Cacho, chief economist at Jarden, an investment bank. “Our fear is that this is still stimulatory. It doesn’t help the RBA’s [Reserve Bank of Australia’s] job.” 

On the surface, Australia has weathered the global surge in inflation comparatively well. Price growth has more than halved from a peak of 8.4 per cent in December 2022 to 3.5 per cent year on year in March.

But that figure marked a small increase from February, and prices are not coming down as quickly as projected. Unemployment, while still low, ticked up to 4.1 per cent in April.

The RBA, which has all but ruled out an interest rate cut this year, recently raised its short-term inflation forecast while lowering economic growth projections.

Meanwhile, a rapid fire cycle of interest rate rises — 13 since 2022 — has deepened rifts in the Australian economy over home ownership. Rental costs have surged to record levels since the pandemic, partly driven by an uptick in migration. Corelogic, a property research company, pointed to an 8.5 per cent annual rise in median rental prices nationwide in April.

Those divisions are fed into consumer spending. Data from Commonwealth Bank of Australia released this month showed that renters have increased spending by only 1.3 per cent in the year to April, compared with 4.5 per cent for those with mortgages and 6.3 per cent for people who have paid off their home loan.

“Clearly people who own their own home are more comfortable,” said Steven Halmarick, CBA economist, noting that older consumers had larger savings pools that benefited from higher rates. 

Even Anthony Albanese, the Labor prime minister, was caught up in the fray over housing inequality when he moved to sell a house in west Sydney, leading to the eviction of a long-standing tenant who complained that soaring rents in the city left him with nowhere to go.

The lack of consumer enthusiasm has started to raise alarms among retailers. Electronics group JB Hi Fi and infant goods company Baby Bunting have warned in recent weeks of a challenging business environment, pointing to inflation and interest rates.

Chalmers argued that the budget handouts, including the energy rebates and rental assistance, would reduce consumer price inflation to the RBA’s target range of between 2 and 3 per cent by the end of the year.

He also stressed that the A$9.3bn budget surplus — which was boosted by increased tax revenue and high commodity prices — would give way to deficits, including a projected A$28bn next year, as the impact of higher spending feeds into the economy.

Stuart Dear, head of fixed income at Schroders, said the budget surplus showed that Australia’s economy remained in a strong position but Labor was taking a more interventionist approach. “The size of the government as a proportion of the economy is increasing,” he said, with spending set to reach 26 per cent of GDP compared with historic levels in the low 20s.

In Murrumbateman, Coe said she was an optimist at heart but that the budget was “lacklustre” in its support for small businesses. “It didn’t leave me feeling inspired,” she said.