Latest CPI figures suggest inflation will stay ‘higher for longer’

While higher inflation data was always on the cards, what appears to have surprised the market today was the rate at which it is still rising, with Australia's headline CPI rising 1.8% on-quarter and 7.3% on-year, ahead of Bloomberg's consensus estimates of 1.6% and 7.1% respectively.

It’s understood that increases in the CPI have exceeded any other results since the GST was introduced in 2000 and underpin the fastest inflation since June 1990.

Equally noteworthy, the more meaningful Trimmed Mean CPI - which excludes large price rises and falls – put on 1.8% on-quarter and 6.1% on-year versus 1.5% and 5.5% expected by economists.

In response to today’s surprise CPI update the 3-year bond yield jumped from 3.48 to 3.618 before settling at 3.55%, while the 10-year yield rose from 3.92 to 4.00 before reverting back to 3.98%.

While core market goods inflation was up from 7.6% to a new record high of 9.1%, core market services inflation rose from 3.7% to 4.8%, the strongest it has been since 2008.

Building costs and gas prices

While inflation in the economy is broad-based, much of the larger-than-expected CPI increase is being attributed to building cost and gas prices.

Due to annual gas price reviews, which saw states and territories pass on higher wholesale gas prices to consumers in the September quarter, overall gas prices rose 10.9%, while building costs were up 3.7%.

Then there are electricity prices which rose 3.2% over July to September.

Inflation yet to peak

Having read the tea leaves within today’s CPI numbers, economics have greater proof that inflation has far from peaked.

According to Capital Economics, there are now clear signs that the housing downturn is starting to dampen price pressures as the 3.7% on-quarter rise in cost of new dwellings was the smallest in the year.

“Consumer prices would have risen by around 2.1 per cent on-quarter if states hadn’t cushioned the 15.6 per cent on-quarter jump in electricity prices with rebates,” the economic forecaster noted.

“We suspect that those rebates will no longer be included in the Q4 figures so the full extent of the utilities price hike will become visible."

Can the RBA afford to taper rate hikes?

With inflation approaching 8% in the fourth quarter, Capital Economics echoes mounting market concern that the Reserve Bank of Australia (RBA) will be forced to hike rates more aggressively than its recent dovish rhetoric would suggest.

“The stronger-than-expected rise in consumer prices in quarter three is consistent with our forecast that the Reserve Bank of Australia will hike rates more aggressively than most anticipate.”

Interestingly, while the budget expects inflation to peak at 7.75% this quarter, Treasury was quick to flag what it sees as “significant risks remaining about the inflation outlook”, which would affect households.

Treasury notes “higher inflation could reflect a large shock to input prices or greater ‘second-round’ effects as businesses pass through input cost pressures.”

In the next breath, treasury also notes this would trim around 0.25 percentage points off economic growth in 2022-23, halve growth the following year from 1.5% to just 0.75%, hence signalling a possible recession.

Difficult times

Treasurer Jim Chalmers believes the current inflationary environment puts Australia in genuinely different and genuinely difficult times.

Chalmers told the market that last night’s budget was consciously low on immediate cost of living relief in an attempt to dampen the current inflationary pain.

“Indiscriminate spraying of cash would have made our inflation challenge more profound and more prolonged and ultimately more painful for people who would have felt it through higher prices and higher interest rates as well.”

Source: ABS