Inflation hits new 33-year high

Inflation has risen to a near 33-year high, the Australian Bureau of Statistics (ABS) has confirmed.

The Consumer Price Index (CPI) rose 1.9 per cent in the December quarter 2022, taking annual inflation to 7.8 per cent — the highest level since March 1990.

According to the data, the most significant price rises were domestic holiday travel and accommodation (+13.3 per cent), electricity (+8.6 per cent), international holiday travel and accommodation (+7.6 per cent), and new dwelling purchase by owner-occupiers (+1.7 per cent).

There was an increase in discretionary inflation of 2.6 per cent in the December quarter following higher prices for holiday travel and meals out and takeaway, the ABS has reported.

The annual movement reached a new high of 7.1 per cent while non-discretionary inflation remained stable at 8.4 per cent, it stated.

Annual CPI inflation had been growing rapidly in 2022.

The past four quarters have seen strong quarterly rises off the back of higher prices for food, automotive fuel, and new dwelling construction, the ABS explained, while trimmed mean annual inflation, which excludes large price rises and falls, increased to 6.9 per cent, the highest since the ABS first published the series in 2003.

Federal treasurer The Hon Dr Jim Chalmers MP described the ABS inflation data as “broadly in line” with the Treasury’s October Budget forecast of inflation peaking at 7.75 per cent in the December quarter, and the RBA’s forecast peak of eight per cent in the December quarter.

“While inflation is unacceptably high, there are some signs that inflation is likely to have peaked, but we won’t know this for sure until data for the March quarter comes in,” he said.

Michelle Marquardt, ABS head of prices statistics, said: “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. 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).”

Highest increase since 1990

Annually, the CPI rose 7.8 per cent with 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 ABS confirmed.

Commenting on the annual results, Ms Marquardt said: “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.”

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

“The annual price increase of discretionary goods and services (+7.1 per cent) moved closer to that of non-discretionary goods and services (+8.4 per cent) compared with recent quarters,” Ms Marquardt said.

As the ABS explained, underlying inflation measures reduced the impact of irregular or temporary price changes in the CPI.

It added that for the third consecutive quarter, annual trimmed mean inflation was the highest since the series commenced in 2003, increasing to 6.9 per cent, up from 6.1 per cent in the September quarter. 

Strong demand over the holiday period

In terms of December 2022 specifically, the ABS also confirmed that the monthly CPI rose 8.4 per cent in the 12 months to December, following annual rises of 7.3 per cent in November and 6.9 per cent in October.

As Ms Marquardt explained: "The monthly indicator recorded the largest annual rise in the series in December.”

“The most significant contributors in the 12 months to December were new dwellings, up 16.0 per cent, and holiday travel and accommodation, up 29.3 per cent.

“Airfare and accommodation prices rose in response to strong demand over the Christmas holiday period."

ANZ sees hikes firming up

Australia and New Zealand bank senior economist Catherine Birch explained: “Australia’s CPI data showed momentum continued to build in domestically driven inflationary pressures in Q4. This cements a 25bp cash rate hike in February and supports our view of another 25bp hike in March, especially if we see a solid print for Q4 wages in mid-February as expected.”

“Trimmed mean CPI surprised to the upside at 1.7% q/q (6.9% y/y), well above the RBA’s pick of 6.5% y/y. 

“Non-tradables and services inflation accelerated, both annualising around 8½% y/y. These measures better reflect underlying and domestically driven inflationary pressures and are more relevant for the RBA’s policy settings than the headline measure,” Ms Birch said.

Westpac responds to 30-year high CPI

Westpac senior economist Justin Smirk reacted: “Hospitality services most important factor in the upside surprise in the December quarter but with the Trimmed Mean coming in broadly as expected this suggests the pace of core inflation is generally unfolding as we expected.”

“The large upsize surprise in the December quarter, compared to our 1.5% forecast, was the 5.4% rise in recreation on the back of a 10.9% increase in holiday travel & accommodation costs. Housing was slightly stronger than expected (1.9% vs 1.7% forecast) with slightly stronger gains in dwelling prices and utilities. However, it only contributed 0.06ppt to our 0.5ppt error confirming that housing is no longer the inflationary story but pressures are shifting more towards services and, in particular, tourism and hospitality services.”

“The Trimmed Mean rose 1.7%, a touch more than Westpac’s 1.6% forecast but 0.2ppt more than the market’s 1.5% forecast. This suggests the overall momentum of underlying inflation is broadly as we expected. 

We are processing the numbers and working through how they will impact on our current inflation forecasts,” he concluded.

Start of 2023 ‘comparatively’ looking better - AMP

“Whichever way you look at it – inflation is at a multi-decade high in Australia,” said AMP Australia  senior economist Diana Mousina.

“Higher headline inflation has creeped into core inflation, which could keep inflation more persistent than expected which is unwanted by the Reserve Bank,” Ms Mousina explained.

“While we have been of the view for a while that the RBA has done enough tightening and that the peak in the cash rate would be at 3.1 per cent (its current level), today’s inflation data (especially the higher trimmed mean) and the recent strong November retail sales figures (which showed that the consumer still remains in good shape despite numerous rate hikes in 2022) means that the we now expect another rate hike in February, by 0.25 per cent which would take the cash rate to 3.35 per cent,” she said.

“The inflation backdrop looks much better at the start of 2023 compared to last year and many inflation indicators are pointing down, which should mean that we are very close to the end of the tightening cycle and that the February rate rise should be the last one for this year,” she added.

[Related: Labour force and inflation to weigh on RBA’s decision ]