Australia inflation races to 32-year high, almost 3 times the pace of wage growth

Analysts are warning that both core and headline inflation in Australia will spike even further this quarter. PHOTO: REUTERS

SYDNEY - Australian inflation raced to a 32-year high in the last quarter as the cost of home building and gas surged, a shock result that stoked pressure for a return to more aggressive rate hikes by the country’s central bank.

Data from the Australian Bureau of Statistics (ABS) on Wednesday showed the consumer price index (CPI) jumped 1.8 per cent in the September quarter, topping market forecasts of 1.6 per cent.

The annual rate shot up to 7.3 per cent, from 6.1 per cent, the highest since 1990 and almost three times the pace of wage growth.

A closely watched measure of core inflation, the trimmed mean, also climbed 1.8 per cent in the quarter, lifting the annual pace to 6.1 per cent and again far above forecasts of 5.6 per cent.

That would be unwelcome news to the Reserve Bank of Australia (RBA) which had thought core inflation would peak at 6 per cent in the December quarter, with CPI topping at 7.75 per cent.

Instead, analysts have been warning that both core and headline inflation will certainly spike even further in this quarter with the ABS’ new monthly CPI accelerating in September.

“The upshot is that CPI inflation will approach 8 per cent in Q4,” said Mr Marcel Thieliant, a senior economist at Capital Economics.

“The stronger-than-expected rise in consumer prices is consistent with our forecast that the RBA will hike rates more aggressively than most anticipate.”

This is particularly ill timed for the RBA since it surprised many this month by downshifting to a quarter-point rate hike, following four moves of 50 basis points.

Rates have already risen by a massive 250 basis points since May and the RBA had wanted to go slower to see how the drastic tightening was impacting consumer spending.

Investors now suspect that the central bank may have to reconsider its stance, perhaps not at its policy meeting next week, but rather in December.

Futures still imply a quarter-point move on Nov 1 to 2.85 per cent, but now show some chance of a half-point hike in December and a peak for rates around 4.2 per cent in July.

The European Central Bank and the Bank of Canada are both expected to hike by 75 basis points this week, while the Federal Reserve in the United States should match that at its meeting on Nov 2.

Australia’s Labor government bowed to inflation concerns this week by restraining spending in its 2022/2023 budget, despite calls for more cost-of-living support amid soaring prices.

There are also fears that recent flooding across eastern Australia will lift food prices even higher, with supermarket chain Coles warning of declining volumes in fresh food where prices were up 8.8 per cent on a year earlier.

Wednesday’s CPI report showed food prices were already climbing at an annual pace of 9 per cent, with the third quarter alone seeing a surge of 3.2 per cent.

The ABS noted that annual inflation for essential goods and services leapt to 8.4 per cent in the September quarter, highlighting the extent of cost-of-living pressures. REUTERS

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