By Jennifer Duke
Households are confronting the sharpest inflation spike in years, fuelling the case for an early interest rate rise, amid warnings soaring prices for petrol, new homes and clothes are squeezing budgets ahead of the federal election.
Over the 12 months to the December quarter the consumer price index jumped 3.5 per cent, Australian Bureau of Statistics data shows. Underlying inflation jumped 2.6 per cent, putting it within the Reserve Bank’s target band of 2 to 3 per cent and the highest rate of growth since June 2014.
Petrol prices surged in 2021.Credit: Luis Ascui
The sharp jump outstripped economists’ consensus of 2.3 per cent and is significantly above both the Reserve Bank’s pre-Omicron forecast of 2.25 per cent for the year. The highest inflation on the RBA’s outlook was 2.5 per cent in December 2023. New forecasts will be released by the RBA next week.
Treasurer Josh Frydenberg said the price rises were due to global supply chain disruptions and more demand for goods, while inflation was still half the rate of the US and below Germany, Canada and the UK.
“But despite the global supply chain disruptions Australia faces, and indeed so many other countries do around the world, the Australian economy is remarkably resilient,” he said.
Mr Frydenberg said a teacher or nurse earning $60,000 a year was paying $2160 less in tax, small businesses have had tax cuts and 1.7 million more people were in work under the Coalition.
Labor treasurer Jim Chalmers said the inflation figures show the cost of living was surging while real wages are going backwards and workers could not afford “three more years of record low wages growth”.
A 4.2 per cent rise in new dwelling purchase prices for home buyers and a 6.6 per cent jump in petrol were the biggest price rises over the last quarter of 2021. Food and non-alcoholic beverages increased 0.7 per cent, with clothing and footwear up 2.6 per cent.
Fuel prices are up 32.3 per cent over the past year - the strongest annual rise since 1990 - and vegetable costs increased 6.1 per cent. Domestic holiday travel prices increased 2.4 per cent over 2021, with a sharp rise in the last quarter as state and territory borders re-opened. Electricity prices increased by 0.4 per cent over the quarter but were 4.8 per cent lower over the year.
Leading economists said higher inflation was the first step towards interest rate rises as early as August, potentially making both cost of living pressures and higher mortgage repayments critical election issues. The Reserve Bank can raise interest rates to increase borrowing cost and thereby reduce spending and inflation, but has continued to say 2024 is the most likely timing for an increase, however unemployment has also fallen faster than the central bank has predicted.
The cash rate has been on hold at the record low level 0.1 per cent since November 2020 and has not been increased since 2010.
BIS Oxford Economics senior economist Sean Langcake said some cost pressures could still be considered temporary but the RBA would likely strike a more “hawkish tone” at its board meeting next Tuesday. Most major bank economists and analysts expect the RBA to end bond purchases next week.
“A rate rise in 2022 is now more likely in light of these data,” Mr Langcake said. “Geopolitical tensions have kept fuel prices elevated through the start of 2022, while Omicron related labour shortages will exacerbate cost pressures in [the first quarter].” Barclays Bank analysts also think rate hikes are likely in 2022, while Deutsche Bank has now brought its prediction forward by nine months to August.
Leading independent economist Saul Eslake, principal of Corinna Economic Advisory, previously thought the RBA could remain on hold until 2023 but now expects an increase later this year.
CommSec chief economist Craig James said inflation had exceeded the RBA’s expectations for two consecutive quarters, but the central bank also wants a jobless rate around 4 per cent or below before it lifts rates as well as wage growth near 3 per cent. Latest wages growth data hit 2.2 per cent and the unemployment rate is 4.2 per cent.
“But with the job market tightening, there are more anecdotal reports that wages are starting to lift,” Mr James said. If wages do not increase, households face cost of living pressures from rising prices. The Commonwealth Bank expects conditions for a rate rise will be met by the December quarter.
Market Economics managing director Stephen Koukoulas said the RBA has now reached both its unemployment and inflation targets and should introduce a small rate rise next week, though conceded this was unlikely.
“The lead into COVID-19 two years ago, when the RBA cut rates to 0.1 per cent, it was appropriate and the right thing to do,” he said, adding the assumptions of a double-digit unemployment rate and low inflation were widely held.
“Fast forward to today and the last week or so we have good numbers,” he said. “The longer you leave [rates on hold] the bigger the problem down the track.”
“We all get forecasts wrong. It’s what you do what when circumstances change so dramatically that matters.”
EY chief economist Jo Masters said underlying inflation over the past six months was running at 3.5 per cent, its fastest pace since 2008, but wages growth remains hard to pin down.
“This uncertainty is important for the timing of the first rate hike – which increasingly looks likely to be late this year,” Ms Masters said.
Job site Indeed’s Asia Pacific economist Callam Pickering said a crucial factor is whether the inflation figures can be considered temporary.
“[The RBA] will be willing to tolerate a brief period of high inflation but if there is a risk that it persists, then they will be forced to address that via raising the cash rate,” Mr Pickering said.
“More broadly, global supply chains are a mess with disruptions and shortages widespread, which eventually flow through to consumers. Freight costs are high and that flows through to a variety of different sectors. Australia has basically imported high inflation from abroad,” he said.