A reflection on the source of domestic inflation - housing

Australia’s biggest inflation problem is not petrol. It is housing.

The August CPI shows housing prices 5.7 per cent higher than a year earlier, making housing the largest contributor to annual inflation.

The detailed ABS contribution data put the scale of the problem into perspective.

Housing added approximately 1.24 percentage points to Australia’s annual CPI increase.

By comparison, the entire tradables component of the CPI — covering prices most exposed to international trade, including fuel and many imported goods — contributed approximately 0.99 percentage points.

Housing alone is therefore currently adding more to Australian inflation than all tradable goods and services combined.

Three components account for most of the housing contribution.

New dwelling prices increased 5.4 per cent over the year and contributed around 0.40 percentage points to CPI. The ABS says builders continue to pass through higher materials and labour costs.

Electricity contributed another 0.32 percentage points. Annual electricity inflation reached 13.2 per cent, although this figure is heavily affected by changes to government electricity rebates and should not be interpreted simply as current market-price inflation.

Rents contributed approximately 0.24 percentage points, with rental prices 3.6 per cent higher over the year.

Together, those three items account for roughly three-quarters of housing’s contribution to inflation.

This helps explain why separating imported from domestically generated inflation matters.

Tradable inflation is currently 2.9 per cent. Non-tradable inflation is 4.5 per cent.

And of the approximately 3.96 percentage points of annual CPI inflation recorded in August, non-tradables contributed 2.97 points — almost exactly 75 per cent.

The immediate August inflation shock came through fuel.

But the reason Australian inflation remains persistently above target lies much closer to home: housing, construction costs and domestically determined services.

The RBA therefore cannot simply wait for oil prices to fall. Even if the global energy shock disappears, a substantial domestic inflation problem remains.