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Friday, March 31, 2023

Inflation is still too hot for comfort

While the jump in inflation in the December quarter Consumer Price Index naturally grabbed all the headlines with a very high reading of 7.8%, up from 7.3% in the September quarter, the new monthly inflation gauge counted the true story and one that will keep the Reserve Bank adjusting its cash rate higher in the first few months of 2023.

According to the monthly indicator, inflation advanced at an annual rate of 8.4% in the month of December.

Now the monthly indicator does not have the same amount of data as the quarterly CPI but since its appearance several months ago, it has given an accurate reading of the upward pace of cost pressures.

The monthly indicator presented an annual rate of 7.3% in November and 6.9% in October (below the 7.3% in September).

The monthly indicator and the core of the quarterly CPI strongly suggest that investors and analysts are seriously mistaken if they believe Australia will follow the US on the path of slowing inflation and easing interest rate pressures.

The two data releases do not support that, especially the weak underlying measures in quarterly CPI favored by the RBA that will keep pressure on the central bank to raise the cash rate.

ABS said that for the third consecutive quarter, the key core inflation measure, trimmed annual average inflation was the highest since the series began in 2003, rising to 6.9%, up from 6.1% in the quarter of september.

That alone will trigger at least two more central bank rate hikes in the coming months, and it wouldn’t be surprising if one of them was in the mid-percent range, or a discussion where a return to big hikes is an option.

Quarterly inflation was 1.9%, compared to 1.8% in the September and June quarters.

The ABS said that the most significant price increases in the monthly indicator for December were Housing (+10.1 percent), Food and non-alcoholic beverages (+9.5 percent) and Recreation and culture (+14.4 percent). hundred).

The December quarter was the fourth consecutive quarter to show a higher increase than any seen since the introduction of the Goods and Services Tax (GST) in 2000.

In the December quarter, ABS said the most significant contributors to the increase in the December quarter were domestic holiday travel and accommodation (+13.3%), electricity (+8.6%) and travel and accommodation international holidays (+7.6%). penny).

“Strong demand, particularly over the Christmas holiday period, contributed to higher prices for domestic holiday travel and international airfares,” Ms Marquardt said.

“Observed increases in domestic and international travel were notably higher than historical movements for the December quarter.”

It’s no surprise that Qantas’ share price is so strong with record interim earnings to be reported next month and the data also helps explain why Virgin Australia’s owners are looking to divest the airline via a float. from the stock market as soon as possible.

It does seem a paradox that the desperation of travelers (national and international) and the high charges for airfare and accommodation in the domestic market are raising the CPI and with it interest rates.

“New home price growth (+1.7%) slowed relative to recent quarters (+3.7% in September and +5.6% in June), but remained stronger than the historical norms.

“Labor and material costs are driving price growth in this area, with signs of easing material cost pressures,” added Ms Marquardt.

ABS said the main drivers of the 7.8% year-over-year increase were new home prices (+17.8%), domestic holiday travel and accommodation (+19.8%) and auto fuel. (+13.2%), the largest contributors. .

“The annual CPI rise is the highest since 1990. Annual inflation for goods like new homes and car fuel leveled off this quarter, however we saw a pick-up in inflation for services like vacations and restaurant meals,” he said. Mrs. Marquardt.

The annual price increase for services (+5.5%) was the highest since 2008 (the GFC), while goods (+9.5%) showed little change from the last quarter.

The annual increase in prices of discretionary goods and services (+7.1%) was close to that of non-discretionary goods and services (+8.4%) compared to the last quarters.

The latest price movement tells us how deeply entrenched price pressures are taking in the broader economy.

There was nothing in the two reports on the monthly and quarterly inflation measures to give the RBA any heart that cost pressures had peaked.

They may have, but the monthly indicator suggests that there is still a lot of price momentum that continues to work its way through services and manufacturing.

Suggestions that energy prices might have peaked are just that at this point: a suggestion and nothing more.

Glenn Dyer

Glenn Dyer has been a financial journalist and television producer for more than 40 years. He has worked for Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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