Booming population is part of our sticky inflation dilemma

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One of the more interesting economic debates that is bubbling away concerns our rapidly growing population, and what this boom is doing to inflation.

Most of the time, you don’t hear much critical commentary about the pros and cons of a fast-growing population from the market economists who work for big banks and investment houses. Corporate Australia is generally on something of a unity ticket in support of strong population growth and reasonably strong migration, after all.


A fast-growing Australia means a bigger market for businesses to sell into, while migration can also help employers deal with skills shortages. And that’s just looking through a narrow economic lens, without considering the many social and other benefits of migration.

Lately, however, booming population growth has become a hot topic in economic circles.

Why? Because it’s becoming clear that the sheer pace of population growth – which is mainly the result of a surge in migration – is having some important effects on the rental market, which then flows into inflation.

It’s yet another factor – alongside swings in the oil price, the outbreak of wars overseas, or the weak Aussie dollar – that makes the inflation-busting job of new Reserve Bank governor Michele Bullock that much harder.

Rapid population growth is affecting inflation via the rental market.Credit: Oscar Colman

The first thing to note about population growth is that it’s taken off far quicker than most people expected, largely because of catch-up from COVID-19 border closures.

The latest official figures show the population grew by 2.2 per cent to 26.5 million people in the year to March, and it’s likely to have accelerated since. Commonwealth Bank economist Harry Ottley this week said that growth rate was probably about 2.6 per cent in the year to September, which he said would be the fastest in half a century.

From a narrow economic viewpoint, the migration-driven surge in population has mixed effects.

On the positive side, it appears to have helped address some of the skills shortages that businesses were grumbling about so much this time last year. Figures from Seek show the number of applications for each job ad has risen for six months in a row, and are now more than double the levels of a year ago.

It’s becoming clear that the sheer pace of population growth is having some important effects on the rental market, which then flows into inflation.

That suggests workers have less bargaining power, which will probably result in slower wage rises than otherwise and eventually take some pressure off inflation. But when you look at the other main ways in which high population growth is affecting the economy, things get more complicated.

For example, the fast growth in population is supporting the total value of retail spending, even though individual households appear deeply pessimistic about the economy.

Figures this week showed retail spending was up a surprisingly strong 0.9 per cent in September, and economists said rising population was one reason for this. While overall spending grew, St George senior economist Pat Bustamante estimates retail trade per person is 0.8 per cent lower today than it was a year ago.

Higher consumer spending than otherwise is good news for the profits of big consumer-facing businesses such as retailers, telcos and banks. But for the Reserve Bank’s task of bringing inflation back within its 2-3 per cent target, it’s less helpful.

Why? Because if household consumption remains relatively strong, that makes it easier for businesses to continue passing on higher costs to their customers, rather than offering discounts.

There are tentative signs some prices aren’t falling as quickly as in other countries. Westpac pointed out after last week’s consumer price index that the prices of TVs and other electronic equipment have not fallen as much here as in the US and Canada, for example. As Westpac chief economist Luci Ellis puts it: “Even though the consumer is very grumpy … there’s still enough demand in an absolute sense that firms are not feeling that they have to discount a lot yet.”

The most important way in which a booming population is affecting inflation, however, is via the rental market.

CBA’s Ottley points out the vacancy rate in capital cities fell to a record low of 0.9 per cent last month, which is causing advertised rents to surge by about 10 per cent and feeding into higher inflation generally.

House prices aren’t part of the consumer price index, but they, too, are being pushed higher by the combination of fast population growth and a lack of supply of new homes. Economists, who were wrong-footed by the surprising strength of house prices despite rapid interest rate rises, are pointing to the migration surge as a key reason for the market’s buoyancy.

So in economic jargon, the surge in population growth is having some big impacts on both the supply and demand sides of the economy.

Migration has eased skills shortages and there are signs it is causing parts of the labour market to loosen. That should ultimately flow into lower inflation as wage costs ease, but it’s a gradual process.

In the shorter term, the population boom is boosting demand.

Businesses can, of course, respond to that by sourcing more products and, eventually, building more homes. But it’s particularly challenging in housing: building enough homes to meet demand has always been difficult, let alone in a time when the population is expanding rapidly.

To be sure, population growth is only part of the picture. It’s got nothing to do with the big rises in the price of petrol, insurance or electricity. But it’s adding to these other forces that are making inflation stickier, or slower to decline, than the Reserve Bank would like. And it’s fuelling more bets on a further interest rate rise as soon as next week.

Ross Gittins is on leave.

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