Prices go up, interest rates may follow

INFLATION has 4.2 per cent, the highest since 1991 when you could get a beer for $1.50 and a litre of petrol for 70 cents. NEWS.com.au compares the cost of living then and now.

Prices go up, interest rates may follow

AUSTRALIA’s rate of inflation has hit a 17-year high and exceeded market forecasts putting pressure on interest rates.

The headline CPI rose 1.3 per cent in the March quarter, for an annual rate of 4.2 per cent. The median market forecast was for a rise of 1.1 per cent in the March quarter and an annual pace of 4.0 per cent.

The RBA's preferred measures of underlying inflation contained within the CPI report showed an average annual rate of 4.25 per cent in the year to March compared to 3.6 per cent previously. The last time underlying inflation was this high was 1991.

"Unacceptably high"

Federal Treasurer Wayne Swan said the inflation figures were "sobering".

"I think these inflation figures are a stark reminder of the price pressures hitting Australian families,'' Mr Swan told reporters in Canberra.

"And I think they demonstrate the pain that people are feeling around the kitchen table."

"They're simply unacceptably high, and they underscore the need for a responsible budget that keeps spending under control, and that tackles inflation and interest rates challenges,'' Mr Swan said.

Rates pressure

RBA governor Glenn Stevens had forecast inflation to hit 4 per cent in the March quarter. A breach of this could pressure the RBA when in two weeks time to decide the next interest rate movement.

ICAP senior economist Matthew Johnson said the central would be “very concerned by the acceleration the core inflation rate”.

“It's obviously far too strong,'' Mr Johnson said today.

“I think it's obviously a fifty-fifty question coming into the May meeting, but I think the slowing global and domestic picture will keep them on the sidelines.”

“But it's no done deal.''

The central bank board next meets to discuss monetary policy on Tuesday, May 6.

Mr Johnson said the RBA would have “no tolerance for any continuation of this sort of inflation trend.”

ANZ head of research Warren Hogan said the strong data meant there was a "prominent risk" of another rate rise after today's numbers.

But he said if the RBA does decide to raise interest rates, it would more likely be in August after the second quarter CPI figures are released in late July.

“It will probably more likely happen in August if they were going to move, rather than in May, because they are seeing the economy slow,'' Mr Hogan said.

“But if the economy does not slow and the next CPI, is high, which we suspect it will be unfortunately, they will probably more likely to move in August.''

Take a joyride back to 1991

There's no doubt Australia’s changed since the last time inflation was this high. In 1991 Roxette's Joyride was at the top of the charts, Hawthorn won the Grand Final, and the Penrith Panthers won their first NRL title over the Canberra Raiders.

Bob Hawke reigned as PM for most of the year as Prime Minister, only to be ousted by Paul Keating in December.

But how did the cost of living compare to back then?

Interest rates were higher, and we were earning less than half of what we take home today. According to ABS data, total full-time weekly earnings in May 1991 stood at $595.60. In November 2007 it was $1162.20.

But as they say, it’s all relative -- the average retail price of household goods looks dramatically different to some of the numbers we’re used to seeing in the supermarket aisles today.

According to the ABS, a pot of full-strength beer (285ml) in a pub cost between $1.47 in Sydney and Hobart ranging to $1.99 in Darwin. A case of full-strength beer averaged around $20. Today it is nearly double that.

The average price of a kilo of spuds was around 75 cents. Today a kilo of loose potatoes at Coles goes for $3.76.

A loaf of sliced white bread averaged at about $1.44. Today the average loaf of white bread costs around the $4 mark. A litre of milk bought from the supermarket would set you back around 90c a litre in 1991. You can now expect to pay around $2.30.

A dozen eggs went for around $2. Today you can expect to pay anywhere from $5 for a dozen caged eggs, right up to more than $9 for a dozen free-range organic ones.

The difference is startling at the petrol pump. Rising world oil prices have pushed today’s petrol prices to around $1.50. In 1991, super petrol, traditionally pricier than unleaded, went for around 70 cents a litre.

A look at the financials

In May 1991, the Australian dollar would get you US76.09 cents. Nowadays it hovers around US91-93 cents, nearing parity.

Interest rates were higher. The Reserve Bank official cash rate was 11.5 per cent in April 1991, but had dropped to 8.5 per cent by December of that year. The official cash rate now sits at 7.25 per cent.

Standard variable home loan rates were 14.5 per cent in April 1991 dropping to 12 per cent by that December. Standard variable rates are now 9.35 per cent.