Daily Management Review

Q3 Core Inflation In Australia Accelerates To 6-Yr High


Q3 Core Inflation In Australia Accelerates To 6-Yr High
The September quarter saw Australian core inflation accelerated to its quickest annual rate since 2015, as rise in prices became more widespread, a huge surprise that prompted markets to bet heavily on interest rate hikes earlier than previously anticipated.
The headline consumer price index (CPI) grew 0.8 per cent in the third quarter of the current year and 3.0 per cent for the year which was according to expectations, according to data released by the Australian Bureau of Statistics on Wednesday.
The Reserve Bank of Australia's (RBA) preferred trimmed mean measure of core inflation, which was forecast to be at 0.5 per cent,  however, jumped 0.7 per cent during the quarter, beating expectations.
The annual rate of inflation sped up to 2.1 per cent, considerably higher than the 1.8 per cent forecast, and set it back to the RBA's target range of 2 per cent to 3 per cent for the first time in six years.
Core inflation in the country will not hit 2 per cent until mid-2023, according to the central bank, which also predicted that cash rates would remain at record lows of 0.1 per cent until 2024.
Markets were already convinced that the RBA was behind the curve on inflation and would have to tighten considerably sooner, maybe by July next year, as a result of the data.
That confidence resulted in investors selling off shorter-dated bonds, as three-year futures fell 16 ticks to 98.870 which was its lowest level since June 2019 and implied a 1.13 per cent yield.
The important April 2024 bond's yield surged to 0.21 per cent, posing a direct threat to the RBA's goal of keeping the cash rate near 0.1 per cent.
The local Australian dollar soared to $0.7535, threatening to reach a four month high of $0.7546 that it had attained recently.
"The strong rise in underlying inflation will keep pressure on the RBA to keep reducing monetary stimulus in the months ahead," said Ben Udy, an economist at Capital Economics.
However, for policymakers to consider an actual rate hike, wage growth would have to exceed 3 per cent, he said.
Since low wage growth has gotten baked in, therefore there is a lot of inertia of inflation in Australia, according to RBA Governor Philip Lowe.
The RBA has set a limit of wage increases to be below the 3 per cent-plus levels which is necessary for keeping inflation within the 2 per cent zone. However, in comparison, wages increased by just 1.7 per cent in the year to June.
Still, risks are leaning to the upside.
There has been a steady hike in petrol prices as it reached multiple new highs at the pumps and rents are increasing after years of stagnation.
The pandemic and weather-related calamities have driven up health-care and insurance prices, while the media is full of dire predictions about stagflation because of the global supply chain issues.
House prices are surging, and customers are worried about rising living costs, which has given rise to predictions of more price hikes.
A six year high of 5 per cent was achieved in an ANZ survey measure of inflation expectations released last week, which could begin to be a drag on the economy if it is sustained.
"As evidenced elsewhere in the world, rising consumer inflation expectations could potentially dampen confidence with households reluctant to spend in the near-term, delaying 'big-ticket' purchases," noted Ryan Felsman, a senior economist at fund manager CommSec