RBA to hike again as inflation hits 33-year high

KPMG

The Reserve Bank will almost certainly hike interest rates in February after higher than expected inflation figures, writes KPMG Chief Economist Dr Brendan Rynne.

The rise in the annual inflation rate to 7.8% in the December quarter’s Consumer Price Index (CPI) – up from 7.3% in September – was higher than expected, with consumer prices now growing at their highest rate since 1990.

Core inflationary pressures also accelerated, with the ‘trimmed mean’ underlying inflation figure increasing by 6.9% year-on-year, the highest level observed since 2003. The continued increase in general price levels in Australia – contrasting with data from the US, UK and EU, which suggests inflation there has peaked in November 2022 – confirms that we are behind other countries in the current economic cycle, most likely by 3 to 6 months.

The largest drivers of inflationary pressures in Australia remain food prices, housing costs and recreation and culture. Over the December quarter however, the largest price increases were recorded in observed in Recreation and culture (+5.4%), Clothing and Footwear (2.6%) and Financial and insurance services (2.0%).

Notably the sectors where labour costs represent a relatively high proportion of costs are also seeing higher than expected inflation outcome, as last year’s wages growth is now embedded and is being reflected in final prices for goods and services.

The continued large spike in inflation in the Holiday Travel and Accommodation category, rising by slightly more than 17% year-on-year, is still reflective of the overhang associated with pent-up demand for international and domestic travel, after the lifting of covid restrictions and the opening of borders.

Fuel prices continued to advance in December, up a notable 13.2% year-on-year. While the average unleaded price remained below the November average, it lifted towards the end of the month. With the benchmark price for fuel’s terminal gate price rising in January 2023 and the restoration of full excise being gradually passed on pump prices, fuel prices are expected to remain high in January 2023.

The December quarter CPI data has also been influenced by a number of factors, including government policy, which has made it more difficult to get a proper read on domestic inflation. The return of the fuel excise to full levels and the associated transition of retail costs at the bowser, plus the adoption of different forms of energy market rebates to households across the states and territories, has made interpretation of these two large components of inflation more complex.

While the upside surprise inflation figures may weigh on consumer confidence and place downward pressure on discretionary spending by households, the data also makes almost certain that the RBA will increase the cash rate target by 25 basis points at the February 7 Board meeting.

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