Australia’s underlying rate of inflation increased to 2.6% annually, which was higher than market expectations

Record fuel petrol prices and the highest cost of building new homes in two decades propelled consumer inflation at the end of 2021 to its fastest pace since mid-2014.

Consumer price index figures released on Tuesday by the ABS showed the headline inflation rate for the December quarter was up 3.5% from a year earlier and 1.3% from the previous three months.

Economists though focused on the underlying rate – or trimmed mean – which strips out the more volatile price movements. That climbed by an annual rate of 2.6%, or the most since the June quarter of 2014, while the quarterly increase was at a 1% clip.

“The big surprise was the 1.0% rise in the trimmed mean, well exceeding the market expectation of 0.7%, highlighting the broad spread of this inflation surprise,” Justin Smirk, a senior Westpac economist said, adding the quarterly pace was the fastest in just over 13 years. “Core inflation is now above the mid-point of the RBA’s inflation target, not something the RBA was expecting in its forecast profile this early nor of this magnitude.”

Michelle Marquardt, head of ABS’s prices statistics unit, said the 4.2% jump in new dwelling costs and the jump of 6.6% in automotive fuel prices were leading contributors to the higher CPI.

“Shortages of building supplies and labour, combined with continued strong demand for new dwellings, contributed to price increases for newly built houses, townhouses and apartments,” Marquardt said. The rises in the second half of 2021 were the fastest since the period prior to September 2000 when the GST began.

“Fuel prices rose again in the December quarter, resulting in a record level for the CPI’s automotive fuel series for the second consecutive quarter,” she said. The lifting of some Covid restrictions and global supply disruptions worsened the bowser pain, with Hobart drivers enduring the largest increases, at 12.4%, followed by Darwin at 9.8% and Perth 9.4%, the ABS said.

The CPI rose in all state capitals, led by Hobart’s 2.2% for the quarter. Melbourne and Sydney, at 1.1% and 1.2% respectively, were close to the national average of 1.3%.

Consumer prices typically serve as a proxy for inflation. The trimmed mean measure, while sitting firmly in the mid-range of the RBA’s target of 2%-3%, has risen from a low of 1.1% in March last year.

The increase to 2.6% – above market expectations – will prompt more banks to follow Westpac’s lead last week and bring forward their predictions of when the central bank will start lifting the official cash rate.

The CBA was one of those updating their forecasts, saying the central bank would “need to make a fundamental adjustment to their ‘low and gradual’ inflation narrative in their upcoming communication next week”.

“We shift our central scenario for the first hike in the cash rate from November 2022 to August 2022 (the risk lies with an earlier hike in June),” Gareth Aird, CBA’s senior economist, said.

Sean Langcake, a senior economist at BIS Oxford Economics, agreed the central bank was likely to adopt “a more hawkish tone” on inflation at its 1 February meeting. “A rate rise in 2022 is now more likely in light of these data,” he said.

The RBA has said it would be patient before lifting rates above the current record low 0.1%, with the first move unlikely before 2023. Westpac expects a move this August.

Uncertainty in global sharemarkets, stoked in part by rising risks of a Russian invasion of Ukraine, would be one reason for rates caution.

Another is that the central bank will want to understand the economic effects of the rapid spread of Omicron that came too late to pick up much in the CPI data.

Fresh figures out from NAB at the same time as today’s CPI release showed business confidence fell sharply in December as Omicron threatened to stall the economic rebound from last year’s east-coast lockdowns.

Confidence last month sank below the level reached during Delta, “signalling the depth of concern among firms about the trajectory of the outbreak,” NAB said.

Business conditions also fell three points to eight index points, in part because firms struggled to find staff. Profitability though was up one point to be 10 index points, and trading conditions were unchanged at 14 index points.

“Conditions eased but remained just above the long-run average in December,” said NAB chief economist, Alan Oster. “Conditions improved in a number of states including Victoria and Tasmania, but there was a large fall in Queensland that may relate to some of the challenges with state borders.”

NAB’s survey also picked up rising price pressures last month, with both reported labour and purchase cost growth near record levels.

“With significant disruption to supply chains and labour markets, price pressures are to be expected and the key question will be how quickly (if at all) these pressures abate over coming months,” NAB said.

Two other measures released on Tuesday offered a more upbeat take on the economy.

The Commonwealth Bank of Australia’s weekly credit card spending tracker revealed a broad rebound had begun, at least in the figures to 21 January.

Consumer spending is “holding up better than feared”, the report said, while adding the necessary caveat that it’s “still early days” in terms of living with Covid. Western Australia, which notably has put off its reopening date to the never-never, was leading all states in the spending rebound.

The ANZ-Roy Morgan Australian Consumer Confidence Survey also showed the mood to be picking up.

Consumer sentiment improved 2.2% last week to be just above the neutral 100 mark in the index. Again, WA helped to lead the improvement, along with Victoria and Queensland, while New South Wales slumped, as did South Australia.

Measures such as whether it’s time to buy a major household item rose 6.3 percentage points, reversing some of the 15.8% fall during the first two weeks of 2022.

Inflation expectations, meanwhile, edged up in the ANZ survey to match a recent high of 5%.

Extracted in full from: Record fuel prices and cost of new homes push inflation to fastest pace since mid-2014 | Australian economy | The Guardian

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