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December quarter inflation figures higher than expected

The Consumer Price Index rose 7.8 per cent in the 12 months to December, higher than the predicted 7.5 per cent, raising the likelihood that the Reserve Bank of Australia will hike the cash rate in February.

Inflation was also higher across the quarter, with CPI increasing 1.9 per cent in the three months to December, according to the latest ABS release, higher than the predicted 1.6 per cent.

The most significant price rises were in domestic holiday travel and accommodation (up 13.3 per cent), electricity (up 8.6 per cent), international holiday travel and accommodation (up 7.6 per cent) and new dwelling purchase by owner-occupiers (up 1.7 per cent).

Michelle Marquardt, ABS head of prices statistics, said inflation remained historically high.

“This is the fourth consecutive quarter to show a rise greater than any seen since the introduction of the Goods and Services Tax (GST) in 2000,” Ms Marquardt said.

“The increase for the quarter was slightly higher than the quarterly movements for the September and June quarters last year (both 1.8 per cent).”

Growth in prices for new dwellings was down compared to the September quarter (when it was up 3.7 per cent) and the June quarter (when it rose 5.6 per cent), but still remained higher than normal.

“Labour and material costs are driving price growth in this area, with signs of material cost pressures easing,” Ms Marquardt said.

“Slowing demand for new dwelling construction was reflected in a lower quarterly rate of inflation for new dwellings this quarter compared with the past five quarters.”

Instead, it was holiday and electricity costs driving the bulk of inflation.

“Strong demand, particularly over the Christmas holiday period, contributed to price rises for domestic holiday travel and international airfares,” Ms Marquardt said.

“The rises seen for domestic and international travel were notably higher than historical December quarter movements.”

The ending of a $400 electricity credit offered by the Western Australian Government to offset household electricity costs had contributed to the rise in that category, she added.

RBA governor Philip Lowe has repeatedly cited high inflation figures as a key reason for the bank hiking the official cash rate, with the latest CPI figures likely to add pressure for the bank to do so again when it meets in February.

“The Board’s priority is to re-establish low inflation and return inflation to the 2–3 per cent range over time,” Dr Lowe said in December.

He warned that high inflation “damages our economy and makes life more difficult for people”.

Worst could already be over

CoreLogic Head of Research Eliza Owen said that despite the high headline inflation figures, several other metrics indicated the worst of Australia’s inflation could already be over.

“More importantly (than headline inflation figures), underlying core inflation (the RBA’s preferred reading on inflation), which is measured by trimming excessively volatile components of CPI, actually fell in the quarter, from 1.9 per cent in September to 1.7 per cent,” Ms Owen said.

“Annual core inflation is still a long way from the two to three per cent target range set by the RBA, at 6.9 per cent.

“However, December marked the first fall in quarterly core inflation since March 2021, following eight consecutive interest rate rises from May 2022.”

A fall in inflation in the housing sector during the December quarter also indicated peak inflation may have passed.

“The housing component has the highest weighting of any sub-group, so a slower rate of growth in housing costs is a key factor that should support a further reduction in both core and headline inflation,” Ms Owen said.

She added that high headline figures meant it was likely the RBA would raise rates in February and possibly March, but predicted the pressure for further rate rises would ease from this point.

“However, with inflation potentially moving through a peak, we are likely to see interest rates peak lower than some forecasters were expecting last year,” she said.

Real Estate Institute of Australia President Hayden Groves said that while CPI numbers were high, their rate of growth had slowed.

“Whilst this is up on the annual figure for the September quarter of 7.3 per cent it is in line with the Budget forecast of 7.75 per cent and just below the RBA’s forecast of 8 per cent, and points to a slowing down in the rate of increase”, Mr Groves said.

He called on the RBA to keep rates on hold in February instead of raising them in reaction to the latest CPI figures.

“With the CPI having peaked within forecasts it is time for the RBA to listen to the chorus of economists calling for a pause on interest rate hikes at its February meeting and assess the lagged impact that past increases have had and not run the risk of grinding the economy to a standstill,” he said.

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Jack Needham

Jack Needham is the Digital Editor at Elite Agent

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