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Inflation still too hot for comfort

While the jump in inflation in the December quarter’s Consumer Price Index naturally grabbed all the headlines with the very high reading of 7.8%, up from 7.3% in the September quarter, the newish monthly inflation indicator told the real story and one that will keep the Reserve Bank tweaking its cash rate higher in the early months of 2023.

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According to the monthly indicator, inflation was running at an annual rate of 8.4% in the month of December.

Now the monthly indicator doesn’t have the same amount of data that the quarterly CPI does but since its appearance several months ago, it has given an accurate reading of the rising rate of cost pressures.

The monthly indicator showed an annual rate of 7.3% in November and 6.9% in October (which was down from 7.3% in September).

The monthly indicator and the nitty gritty of the quarterly CPI strongly suggest that investors and analysts are very much mistaken if they believe Australia is set to follow the US down the path of slowing inflation and easing interest rate pressures.

The two data releases do not support that, especially the weak underlying measures in the quarterly CPI favoured by the RBA that will keep the pressure on the central bank to lift the cash rate.

The ABS said that for the third consecutive quarter, the key underlying inflation measure, the annual trimmed mean inflation was the highest since the series commenced in 2003, increasing to 6.9%, up from 6.1% in the September quarter.

That alone will wring at least two more rate rises from the central bank in the next few months – and it wouldn’t surprise if one of those was half a per cent – or a discussion in which a return to big rises is an option.

Quarter on quarter inflation was 1.9%, up from 1.8% in the September and June quarters.

The ABS said the most significant price rises in December’s monthly indicator were Housing (+10.1 per cent), Food and non-alcoholic beverages (+9.5 per cent) and Recreation and culture (+14.4 per cent).

The December quarter was the fourth consecutive quarter to show a rise greater than any seen since the introduction of the Goods and Services Tax (GST) in 2000.

In the December quarter, the ABS said the most significant contributors to the rise in the December quarter were Domestic holiday travel and accommodation (+13.3 per cent), Electricity (+8.6 per cent), and International holiday travel and accommodation (+7.6 per cent).

“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.”

It’s no wonder Qantas share price is so strong with record interim earnings to be reported next month and the data also helps explain why the owners of Virgin Australia are looking to unload the airline via a stockmarket float as soon as possible.

It does seem a paradox that the desperation of travellers (domestic and international) and the high airfare and accommodation charges in the domestic market, are driving the CPI higher and interest rates with it.

“Growth in prices for hew dwellings (+1.7 per cent) slowed relative to recent quarters (+3.7 per cent in September and +5.6 per cent in June) but remained stronger than historic norms.

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

The ABS said the main drivers in the annual rise of 7.8% were the price of new dwellings (+17.8 per cent), Domestic holiday travel and accommodation (+19.8 per cent) and Automotive fuel (+13.2 per cent) the most significant contributors.

“The annual increase for the CPI is the highest since 1990. Annual inflation for goods such as new dwellings and automotive fuel steadied this quarter, however we saw an uptick in inflation for services such as holidays and restaurant meals,” Ms Marquardt said.

The annual price increase for services (+5.5%) was the highest since 2008 (the GFC), while goods (+9.5%) showed little change from last quarter.

The annual price increase of discretionary goods and services (+7.1%) moved closer to that of non-discretionary goods and services (+8.4%) compared with recent quarters.

The latter price movement tells us how deep the price pressures are becoming embedded in the wider economy.

Thee was nothing in the two reports on the monthly and quarterly inflation measures to give the RBA any heart that cost pressures had peaked.

They might have but the monthly indicator suggests there remains a lot of price momentum still working its way through services and manufacturing.

Suggestions that energy prices might have peaked are just that at the moment – a suggestion and nothing more.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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