Australia’s accelerating inflation boosts RBA rate hikes

Australian inflation accelerated to the fastest pace in 32 years in the final three months of 2022, beating forecasts and prompting money markets to price in a rate hike at next month’s central bank meeting.

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(Bloomberg) — Australian inflation accelerated to the fastest pace in 32 years in the final three months of 2022, beating forecasts and prompting money markets to price in a rate hike at next month’s central bank meeting.

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Bond yields and the currency rose as the consumer price index rose 7.8% from a year earlier, beating economists’ estimate of 7.6%, official data showed on Wednesday. The result indicates that inflation remains very strong even after 3 percentage point rate increases between May and December.

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While the headline number came in slightly below the Reserve Bank’s forecast of 8%, it shows Australia is lagging behind its developed world peers. In a number of economies, the inflation impulse has started to ease, with encouraging signs from producer prices to shipping costs.

“Inflation has probably peaked but remains way too high,” said Su-Lin Ong, head of fixed income strategy at Royal Bank of Canada. “The data likely seals the case for a 25 basis point hike in February and the prudent approach would also be a final 25 bps in March to see terminal at 3.6%.”

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Traders similarly reacted to the numbers by hailing a hike at the February 7 meeting, with swaps indicating a better than 90% chance of a quarter-point move to 3.35%. The currency also hit its highest level since August and government bond yields advanced after the release.

In contrast, Australian shares erased gains and fell as much as 0.5%, lagging regional peers.

What Bloomberg Economics Says…

“Inflation continues to reflect upward pressure from high commodity prices on fuel and construction costs, combined with the impact of extreme weather on food supplies. We expect pressure from these sources to reverse course over coming months.”

— James McIntyre, economist

To read the full note, click here

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Core inflation, a measure preferred by the RBA, accelerated to 6.9% last quarter from a year earlier, beating economists’ forecast of 6.5%. This reading of the trimmed average measure was the strongest since the series began in 2003.

Australia’s inflation release came hours after New Zealand reported CPI data that may have opened the door to less aggressive hikes.

The RBA raised its cash rate to 3.1% in December, saying it would do “whatever is necessary” to bring inflation back to its 2-3% target. It predicts that the fourth quarter would be the peak for CPI.

Today’s report also showed:

  • The services component of the CPI recorded its biggest annual rise since 2008, the ABS said
  • Prices for tradables, which are typically influenced by currency and global factors, rose 8.7% from a year earlier
  • Non-tradable prices, which are largely influenced by local variables such as utilities and rents, climbed 7.4%

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Globally, early evidence of easing price pressures has fueled expectations that central banks are nearing the end of their tightening cycle or at least that super-sized hikes are now a thing of the past. Markets are pricing in one last increase from the Bank of Canada later today and the Federal Reserve is expected to slide down to a quarter-point move at its next meeting.

In Australia, while inflation remains hot, timely data on the economy shows rising rates and input costs are putting pressure on businesses and households.

“The outlook for monetary policy is currently complicated,” says Callam Pickering, economist at global workplace Indeed Inc. in May last year.”

Australian Treasurer Jim Chalmers agreed that inflation was “unacceptably high”, while adding that there were signs that price growth had peaked.

“While further monthly data and the figures from the March quarter will tell us more, we do expect inflation to moderate over the course of this year.”

—With help from Tomoko Sato and Garfield Reynolds.

(Updates with comments from economists, treasurer.)


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