Australia’s inflation surge in Q4, market bay for rate hikes

Sydney — Australia’s core inflation has skyrocketed to the fastest annual pace since 2014 as fuel and housing costs have created widespread price pressures. This is a shock that evokes market speculation about early interest rate hikes.

The Australian Bureau of Statistics data released Tuesday showed that the Headline Consumer Price Index (CPI) rose 1.3% in the fourth quarter and 3.5% annually, surpassing expectations.

The Reserve Bank of Australia (RBA) -backed Truncated Mean of Core Inflation surged 1.0% this quarter, the largest increase since 2008.

The annual pace rose to 2.6%, well above both the 2.3% forecast and the middle of the RBA’s 2% to 3% target range.

This is a surprise to the RBA, which expected core inflation not to reach 2.5% by the end of 2023, and is the main reason it did not expect a rate hike this year.

That outlook will now be terribly challenged when the RBA Board meets on February 1. Analysts usually expect interest rates to remain at 0.1%, but may call for the termination of bond purchases as part of a quantitative easing campaign.

“The RBA is almost certain to end its asset purchase scheme at next week’s meeting,” said Ben Woody, an economist at Capital Economics. “Our expectations that wage growth will be strong this year mean that the World Bank has enough evidence to raise rates by November.”

Rising living costs, coupled with soaring house prices, are becoming the backbone of political controversy in the upcoming national elections by May.

ABS noted that the boom in housing construction combined with a shortage of materials and labor has helped drive the largest rise in new home prices in 20 years.

Tuesday’s data has bolded markets that have long bet that the RBA is lagging behind the inflation curve and needs to be tightened early, perhaps by May of this year.

The rise to 0.25% will be fully priced by June and there will be three more moves to 1.0% by the end of the year.

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The RBA argued that inflation was not yet a problem for Australia, less than half the levels seen in the United States and the United Kingdom.

Soaring energy and used car prices are a major factor in US inflation, but while ABS does not include used cars in the CPI, Australia is actually lowering electricity costs.

Wages are even more restrained in Australia, with annual growth of only 2.2%, less than half the pace of the United States and the United Kingdom.

Still, the unemployment rate has fallen much faster than expected, reaching its lowest level since 2008 at 4.2%, approaching the lowest level of wage increases in the past.

The recent explosive growth in coronavirus cases has complicated the situation, not only curbing personal consumption, but also creating supply bottlenecks that can increase inflationary pressures.

According to a company survey conducted by NAB on Tuesday, sales were fairly strong in December, but costs were rising at the fastest pace in the last few years, but confidence was broken.

“Price pressures are expected due to significant supply chain and labor market disruptions,” said Alan Oster, NAB’s Chief Economist. The key question is how much these pressures will be in the coming months. Is it alleviated soon? “

Wayne Cole