Inflation levels defy market expectations

Latest consumer price index figures released by the Australian Bureau of Statistics has revealed inflation for the December quarter rose 1.3 per cent as a result of significant price rises in new dwellings, automotive fuel and domestic accommodation and travel.

Upper bounds of CPI forecasting were predicting a quarterly rise of around 1.1 per cent, while more conservative estimates were indicating a 0.7 per cent spike.

Annual inflation through to December came in at 3.5 per cent, while the trimmed mean rate stands at 2.6 per cent year-on-year and is the highest level since 2014.

Stronger than expected inflation following the 2021 Delta lockdown is expected to have implications on the Reserve Bank and its current monetary policy setting for the cash rate which stands at 0.1 per cent.

A number of economists and the market are anticipating the RBA will move interest rates up later in the year, despite the central bank claiming it would not move until at least the end of 2023.

Head of Price Statistics at the ABS, Michelle Marquardt flagged major price rises in new dwellings occurred from constraints in construction supplies in combination with higher levels of demand.

READ MORE:

Higher levels of demand have been generated nationwide due to government incentive schemes such as HomeBuilder and the first home deposit scheme which is linked to new dwelling developments.

"Shortages of building supplies and labour, combined with continued strong demand for new dwellings, contributed to price increases for newly built houses, townhouses and apartments," Ms Marquardt said.

"Fuel prices rose again in the December quarter, resulting in a record level for the CPI's automotive fuel series for the second consecutive quarter."

ANZ economist Hayden Dimes noted accelerated inflation would force the RBA to revise its economic outlook.

KPMG economist Brendan Rynne said inflation would put pressure on the RBA to change its current monetary settings, but a move too early could put the breaks on an economy still recovering from the pandemic.

"If it pulls back monetary stimulus too soon some will say it is too aggressive and should let the economy run until a problem emerges," Dr Rynne said.

"But if it lets the economy run too hot some will argue it has contributed to runaway inflation and will need to shock the economy to cool it down, possibly leading to asset market dislocation and the risk of recession."

Treasurer Josh Frydenberg said the level of inflation is still half compared to other economies such as the United States and Germany.

"Today inflation was up off the back of global supply chain disruptions and increased demand for goods," he said.

"At 1.3 per cent for the quarter and 3.5 per cent through the year, inflation in Australia is half of what it is in the United States and lower than it is in Germany, Canada and the United Kingdom."

Domestic tourism and accommodation prices over the quarter went 4.8 per cent compared to the prior corresponding period.

Ms Marquardt also outlined the annual price inflation of goods surpassed services and was the highest quarterly level recorded since 2008.

She also noted fuel prices were the largest factor to the rise and price rises were reflecting higher costs in the global supply which are being impacted by the COVID-19 pandemic.

"Fuel prices were the largest contributor to higher goods inflation. More broadly, global supply chain disruptions and material shortages, combined with rising freight costs and high demand, contributed to price increases across a wide range of goods including dwelling construction materials, motor vehicles, furniture and audio-visual equipment," Ms Marquardt said.

Labor Treasury spokesman Jim Chalmers said the price rises were occurring despite little to no wages growth.

"Tuesday's new inflation numbers show that under Morrison and Frydenberg the costs of living like petrol and housing are skyrocketing while real wages are going backwards," he said.