Prices to rise even higher, annual inflation could rise beyond 5 per cent

Australians have been warned to brace for even more price hikes on basic essentials like food, petrol and electricity as inflation is tipped to break a 15-year record.

Australians are in for even more pain at the checkout, after three months of the fastest price hikes since the GST was introduced in 1999.

New forecasts from ANZ warn year-on-year inflation – the average increase in consumer prices over 12 months – will be the highest in nearly 15 years by the end of June.

The report predicts the inflation rate for the first three months of the year, due from the Australian Bureau of Statistics in less than two weeks, will be 1.8 per cent.

The key drivers of last quarter’s inflation have been cost increases in housing, food, and transport which have been in turn driven by various disruptions including the Russian invasion of Ukraine and the Omicron strain of the coronavirus.

The Reserve Bank traditionally aims to keep the annual inflation rate between 2 and 3 per cent, in order to strike the optimal balance between rising consumer prices, investor confidence and incentivising risk-taking in order to facilitate economic growth and innovation.

ANZ predicts underlying year-on-year inflation will be 3.4 per cent, which will be the first time since 2010 that the rate goes above the Reserve Bank’s inflation target.

Philip Lowe, Governor of the Reserve Bank of Australia. Picture: Jeremy Piper/NCA NewsWire

ANZ predicts that petrol prices could be 35 per cent more expensive than at the same time last year, after an 11 per cent growth in prices since the previous quarter. The bank says the cut in the petrol excise announced in the Budget delivered in the last fortnight will “marginally lower” the second quarter inflation rate.

In addition to petrol prices, increases in housing prices and food drove ANZ’s forecast.

ANZ says that food prices will have increased 1.6 per cent in this year’s first quarter, the largest increase since the first quarter of 2020 when droughts, fires, and panic-buying at the start of the pandemic pushed up prices.

This is driven by both global and domestic pressures, said Ms Birch.

“Early in the quarter, Omicron caused a sharp drop in worker availability, due to having Covid or being in isolation, and disrupted supply chains, leading to restricted food supplies. In the second half of the quarter, east coast flooding affected food production and supply chains.”

Global food prices are increasing rapidly, with the UN Global Food Index going up by more than 50 per cent since mid-2020. Oxfam recently released a report saying that this increase will push a quarter of a billion people – more than 1 in 30 people in the world – below the poverty line.

ANZ expects food prices to continue increasing.

Supply and shipping have come under unexpected pressures during the pandemic. Picture: Sebastien Salom-Gomis/AFP

It is unlikely the RBA will raise the cash rate next month in the run-up to the federal election, but it cannot be ruled out, says the report, which is in line with the predictions of other economists.

ANZ senior economist Catherine Birch said that further inflation is expected.

“[Headline inflation] could exceed five per cent year-on-year in the second quarter, which would be the highest since the introduction of GST.”

Dr Shane Oliver, chief economist at AMP, agreed with the assessment.

“We are going to be heading for 5 per cent, or possibly more, inflation by the middle of the year.”

He said inflation may begin to subside afterwards, contingent on a handful of factors.

“I’d like to think that by the middle of the year, we will have peaked. If commodity prices have peaked, global production goes back to normal, and some of these supply disruptions come to an end.

“But a lot depends on ending the war in Ukraine and China opening up again.”

He added such high inflation numbers could prompt the RBA to raise the cash rate, not by 15 points to 0.25 per cent, but by 40 points to 0.5 per cent. Central banks around the world are increasingly taking the uncommon step of raising the cash rate by two units rather than one to curb inflation.

Nonetheless, the predictions of higher inflation will come as unwelcome news for consumers, who have already been reeling from rising prices.

This comes on the heels of new consumer price numbers from the US and UK, whose economies are seeing extraordinary rates of annual inflation, at 8.5 per cent and 7 per cent respectively. It is the highest rate of inflation the US economy has experienced since 1981, and the UK’s highest rate since 1992.

These global trends are, in part, driving Australian trends, said Ms Birch.

“The global inflationary environment is heated, with inflation now picking up in Asia too,” said Ms. Birch. “The Ukraine conflict, disruptions from the Omicron wave and Australia’s flooding are all inflationary events.

“But persistent domestic factors are also strengthening. In particular, businesses are now passing on cost increases to consumers rather than absorbing them.”