Big spending consumers helped drive an end-of-year price surge that pushed inflation to its highest point since 1990, jolting markets and raising the risk that the Reserve Bank of Australia will increase interest rates next month.
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Headline inflation jumped 1.9 per cent in the last three months of 2022 to reach an annual rate of 7.8 per cent as determined holidaymakers forked out for expensive airfares and hotels and households stumped up for high power bills.
The relentless rise in prices, which have climbed almost 5 percentage points since bottoming out at 3 per cent in September 2021, comes despite aggressive action by the Reserve Bank of Australia to clamp down on demand by pushing the official cash rate from 0.1 per cent to 3.1 per cent since last May.
The result increases the likelihood that interest rates will rise further, beginning with a possible hike of at least 0.25 of a percentage point on February 7.
Prime Minister Anthony Albanese acknowledged that families were feeling the financial strain.
"They've been doing it tough and we know that interest rate increases are having a real impact on family budgets," Mr Albanese said.
Treasurer Jim Chalmers said inflation was "the primary challenge" confronting the economy but held out the prospect that price pressures will ease during 2023.
"While further monthly data and the [inflation] figures from the March quarter will tell us more, we do expect inflation to moderate over the course of this year," Dr Chalmers said.
But shadow treasurer Angus Taylor accused the government of being "asleep at the wheel" on inflation.
"The Treasurer has his fingers and toes crossed, hoping inflation has now peaked but that's cold comfort for the millions of Australians struggling to keep up with rising power bills, soaring grocery prices and surging mortgage repayments," Mr Taylor said. "The Treasurer isn't offering any solutions."
The December quarter increase in the Australian Bureau of Statistics' consumer price index left headline inflation just shy of the 8 per cent peak forecast by the RBA.
But the central bank's preferred measure of inflation, the trimmed mean (which excludes volatile items like food and fuel) jumped to 6.9 per cent, which was well above the 6.5 per cent peak the RBA expected.
The growth and persistence of underlying inflation is expected to concern the RBA and could signal that it has more work to do to tame inflation.
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Adding to its worries is that the tight labour market (unemployment is at 3.5 per cent) could enable an unsustainable lift in wages as hard-pressed workers push for pay rises that more closely match the rise in the cost of living.
But in setting its monetary policy, the RBA is also expected to pay attention to more recent evidence that price pressures, both globally and locally, are starting to ease. International fuel prices have moderated since Russia's invasion of Ukraine as supplies have improved and unseasonably warm temperatures in northern Europe crimped energy demand.
Domestically, housing construction costs, which had been a major source of inflation pressure during much of last year, slowed sharply in the December quarter down to 1.9 per cent growth after reaching 4.7 per cent in the previous quarter and there are signs that demand for workers is slowing.
Market Economics managing director Stephen Koukoulas said whether or not there would be a February rate rise was a finely balanced decision.
While inflation was high late last year, indications since were that price pressures and labour demand are easing, signaling that the economy may be slowing and raising the risk further rate increases could cause a downturn, Mr Koukoulas said.
"Having made so many mistakes in the last few years, I don't think the Reserve Bank would like to have its fingerprints all over that," he said.
Australia Institute senior economist Matt Grudnoff said last quarter's inflation jump was "not the respite Australians were hoping [for from the] surging cost of living".
Mr Grudnoff said the fact that price growth in goods (9.5 per cent) outstripped that for services (5.5 per cent) showed that supply chain shocks stemming from the pandemic were still having a greater impact on inflation than wages.
He urged the Reserve Bank to widen its focus from just inflation when considering whether to raise rates next month.
"The RBA needs to look at the impact of future rate rises on the whole economy, rather than a simplistic focus on headline inflation alone," Mr Grudnoff said.
But CPA Australia senior manager, business and investment policy, Gavan Ord, said it was "too early to say inflation has peaked", and the latest CPI result had increased the likelihood of a February rate hike.
Mr Ord said CPA members were reporting that consumer spending was yet to fall significantly and the impact of previous rate rises was yet to be fully felt.
Australian Chamber of Commerce and Industry chief executive Andrew McKellar agreed.
Mr McKellar said that with inflation having reached a three-decade high, the RBA was "right to be wary about high prices persisting" and tipped it would raise its cash rate next month.