The assistant treasurer has flagged further stress for household budgets following a spike in US interest rates.
The US Federal Reserve announced a 0.75 per cent increase in official rates to a target range of 3 to 3.25 per cent, the highest levels in almost 15 years.
It comes off the back of higher-than-anticipated inflation figures, which have sent shockwaves through share markets,
Assistant Treasurer Stephen Jones says Australia’s economy isn’t immune to international pressures, including from the US.
Also fuelling inflation are supply chain constraints from continued lockdowns in China and the war in Ukraine pushing up energy and commodity prices, putting pressure on Australian household budgets.
“There’s no doubt that anything that happens in the US has an impact on us, this is the biggest economy in the world,” Mr Jones told ABC Radio.
“When they start moving their rates it has an impact on ours, it has an impact on our currency.”
While Australians are expected to face higher interest rates, the alternative path of rampant inflation would be worse for households and businesses, he said.
“Nothing is going to hurt households and businesses more than galloping inflation. This is pain, we know it’s painful, but it’s necessary.”
National Australia Bank’s Ray Atrill noted the US Fed was projecting GDP growth for 2022 of 0.2 per cent and 1.2 per cent for 2023.
“So, still a soft landing as such with no formal recession,” he said.
But inflation in the US was still anticipated to be four years off returning to the Fed’s two per cent medium-term target, Mr Atrill said.
There are calls for the government to provide cost-of-living relief in its upcoming October budget after refusing to extend a temporary cut to fuel excise.
Treasurer Jim Chalmers has repeatedly said the government will maintain fiscal prudence, describing the upcoming budget as “bread and butter”.
Mr Jones said a temporary uplift in the budget’s bottom line, some $50 billion driven by high commodity prices and less expenditure than expected, would not remove the need for austerity.
“If you get a couple of overtime shifts you don’t immediately go out and double your housing mortgage,” he said.
“We expect there’s going to be difficulty down the line. We know this is coming at us.
“Now more than ever it’s important we deal with the issues and we have a responsible budget that doesn’t add to the $1 trillion debt.”
In positive economic news, the National Retail Association reported profitability in the sector had bounced back to pre-COVID levels.
Retail profits increased by 4.9 per cent year-on-year for the June quarter.
The association’s interim chief executive Lindsay Carroll said it showed the sector was heading in the right direction after a tough few years.
“However, we must keep in mind that the increase in profitability is attributable in part to the rising costs of goods and services, rather than sales volumes,” she said.
“With inflation set to continue rising, retailers can expect some challenges to persist.”
The report measured sales to have risen by 0.3 per cent, wages by 0.4 per cent and inventories by 1.3 per cent in the June quarter.