Australian Economy

Private schools, dental visits fuel Australian inflation, pushing interest rate cuts off the table

PUBLISHED : Monday, 03 February, 2014, 3:18pm
UPDATED : Monday, 03 February, 2014, 3:18pm

The laudable desire of Australians to be well educated and healthy is proving an expensive one, as escalating costs add to inflationary pressures even as the broader economy slows.

The stubbornness of domestic inflation is proving most unwelcome to policymakers who want to keep interest rates at rock-bottom levels as Australia struggles through the autumn of a historic mining boom.

It means that the Reserve Bank of Australia (RBA) could be forced to close the door on further rate cuts when it holds its first policy meeting of the year on Tuesday.

The central bank might also have to ratchet back the rhetorical campaign for a weaker local currency given the risk higher prices for imported goods could further fuel inflation.

“Higher near-term inflation and risks from the exchange rate make it hard for the Reserve Bank to keep a weak easing bias, and it will likely shift to neutral,” said Kieran Davies, an economist at Barclays in Sydney.

“Further out, we see the bank remaining on hold for the rest of the year, with hikes starting in Q1 next year, assuming the economy is picking up by then.”

The central bank has held its policy rate steady since cutting it to a historic low of 2.5 per cent in August but had stated there was scope for further easing if needed given inflation was low.

So it would have been blindsided when its favoured measures of underlying inflation spiked by a steep 0.9 per cent last quarter. The annual pace of inflation picked up to 2.6 per cent, well above the 2.25 per cent the central bank had expected.

While that is still well within the RBA’s long-term target band of 2-3 per cent, it had thought it would take until the middle of this year for inflation to reach just 2.5 per cent.

If the third and fourth quarters are added together and annualised, as the central bank’s policy wonks like to do, then inflation is already running at 3 per cent.

The central bank will now almost certainly have to revise up its forecasts for inflation when it releases its quarterly economic outlook on Friday.


Much of the problem is home made, with inflation in many service sectors proving very “sticky” despite sluggish wage growth and falling unit labour costs.

Until last year, a strong Australian dollar had flattered the picture by tamping down prices for imported goods. But with the currency having fallen, the stubbornness of domestic inflation is being revealed.

Culprits include long-term changes in spending habits and demographics, including the escalating cost of education.

While putting a child through 13 years of private schooling can easily cost A$250,000 (HK$1.7 million) in fees alone, it is insanely popular with an increasingly affluent, and aspiring, middle class.

No less than a third of all students in Australia go to independent schools of one form or another.

Add in the cost of uniforms, laptops and the like, and parents in Sydney can look forward to spending upwards of half a million dollars, according to a survey by the Australian Scholarships Group.

Another structural pressure is health costs, linked both to an ageing population and the escalating price of ever more advanced medical care.

Dental work is so expensive, there is a thriving business in medical tourism, with Australians travelling to Thailand and Malaysia to get the work done at less than half the cost.

Annual inflation for education is running at 5.6 per cent and has not been under 5 per cent since 2008. Inflation in health care is not far behind, at 4.4 per cent.

Add to that the ever rising costs for child care, utilities and government charges and taxes, and it is an inflationary mix.