Treasury is predicting inflation will fall back to its target band of 2-3 per cent by the end of the year – 12 months earlier than the Reserve Bank expects – which, if accurate, could lead to an early interest rates cut.
The forecasts, to be published in tomorrow night's federal budget, will show the consumer price index (CPI) is set to fall back under 3 per cent by December 2024.
That would be more than a 0.6 per cent drop from the current inflation rate of 3.6 per cent in just nine months and would see CPI in the target range for the first time since March 2020.
It's also a significant departure from the RBA's forecast, which has inflation increasing to 3.8 per cent in December before falling to 3.2 per cent next June and finally reaching the target band in late 2025.
Finance Minister Katy Gallagher said the contrasting forecasts are due to policies to be unveiled in the budget, which Treasury takes into account but the RBA can't.
"The inflation projections or forecasts that are done by the RBA are done independently of government," she told Today this morning.
"The Treasury forecasts, which will be released in the budget, have taken into consideration all of the decisions we've taken in the budget. Obviously that wasn't available to the RBA.
"So I don't think there's any surprise that there's a bit of a difference there."
If the Treasury forecast is proven to be accurate, that would almost certainly lead to an earlier-than-expected interest rate cut.
Banks are predicting the first cut to come either late 2024 or early 2025 thanks to last month's unexpectedly high inflation figures.
But those predictions would be altered once again if the CPI drops quicker than what the RBA expects.
Gallagher said the budget would include measures to combat inflation – although added people would have to wait until tomorrow night to see what those steps are.
"We don't think that the inflation challenge is complete or that the job's done," Gallagher said.
"There is more work to do. We recognise that, which is why we've been mindful of it.
"It's been one of those primary areas of focus for us in the decisions that we've taken."
While the budget is set to include a number of spending initiatives to take pressure off the cost of living, RBA Governor Michele Bullock said last week she didn't expect it to add to inflation.
"They don't want to try to add to inflationary pressures, but we will have to see what the budget comes out like," she said.
"And then we can think about how that might impact our forecasts. But as I've said, the signs at least by what has been said to me is that inflation is front of mind (for the government)."
