Inflation reaches highest level since 2000

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WITH the federal election looming, inflation has overtaken expectations for the March quarter after rising to its highest level since the introduction of the GST in 2000 outstripping wages growth, driven by soaring construction, childcare and fuel costs.

According to the latest data released by the ABS, the Consumer Price Index (CPI) has risen by 2.1% over the March quarter and by 5.1% over the last 12 months, a rate not seen since September 2000.

As a result, the RBA is now expected to bring forward rising rates to its meeting in the first week of May, for an anticipated increase of 0.4% bringing the cash rate up to 0.5%.

This would be a far more aggressive hike than previously anticipated, with Australia potentially risking the same unstable inflation expectations seen in other countries, a more restrained increase would likely fail to bring inflation down and under control.

“While there are some temporary factors that are leading to a lift in inflation, there has been a cumulative impact on consumer prices from these temporary or short-lived supply issues which are leading to uncomfortably high consumer prices,” noted Shane Oliver, head of investment strategy and chief economist at AMP.

Price increases were most pronounced for petrol and new dwelling purchases by owner-occupiers, with quarterly increases of 11% and 5.7% respectively.

The rising cost of construction, thanks in large part to high levels of activity paired with material and labour shortages in the industry, has left new dwelling prices to also see their greatest bump since 2000.

While the end of a heightened period of government construction grants in the previous quarter also left prices to soar.

According to PEXA’s Mortgage Insights report, the current historic low interest rate environment combined with the anticipation of the imminent RBA hike has lead owners to refinance right across Australia.

“The major banks ceded ground to the non-majors in the first quarter of 2022 in both new loans and refinances. This was driven by the major banks increasing fixed loan rates in expectation of interest rate rises, together with non-majors competing strongly on variable loans,” said Mike Gill, head of research at PEXA Insights.

While all mainland states saw a decline in new loans for the quarter, refinance volumes were up, with WA and Queensland most pronounced with a 54% and 43% annual rise.

At the same time, fuel prices, which have been experiencing a global price explosion, were up for the seventh consecutive quarter, with the annual increase the greatest seen since the  invasion of Kuwait in 1990, up 35.1%.

This is thanks in part to increased global demand as COVID-19 restrictions ease, as well as an oil price shock following the Russian invasion of Ukraine in February.

“Impacts from higher commodity prices and global supply issues could also still persist for the remainder of the year which means that we haven’t reached the peak in annual inflation yet,” added Oliver.

Over the quarter 56% of CPI categories saw a price increase exceeding 3%, up from just 35% in the previous quarter.

Education recorded significant increases over the quarter, up 4.5%. Tertiary education particularly has seen a 6.3% rise, with university fees raising as new students enter into the new fee structure introduced last year with the Job-Ready Graduate package.

While secondary education saw a 3.0% increase, preschool and primary education saw a 4.5% increase, attributed in large part to the end of free preschool in Victoria.

“Too many families with young children are trapped in a vice of rising rents and soaring childcare costs, and not much room to move for some relief,” said Jay Weatherill, director of the Thrive by Five, childcare reform campaign.

Childcare affordability has emerged as a key issue in the run up to the federal election, with the Coalition reaffirming its budget commitments to the sector and Labor promising to both boost and match the current government’s reforms.

“Reducing the cost of high-quality childcare will free up family budgets, help address inflation and the impacts of potential interest rate rises, and support more parents to re-enter or stay in the labour market.”

Rents were also up for the quarter, only marginally in Sydney and Melbourne, though Darwin and Perth saw a respective 11.3% and 9.7% jump.

The only major contributor area which recorded a significant decline was unsurprisingly international holiday travel and accommodation, which fell by 23.1%.

While the RBA would typically delay raising rates until it can assess wage data from the March quarter, especially ahead of the election on May 21, any delay could lead to greater inflation expectations, which is crucial in keeping inflation down.

“[W]ith the jobs market so tight it’s only a matter of time before wages growth picks up and various surveys suggest that its already doing so anyway and waiting till June to raise rates will probably have little impact on the election outcome as everyone knows rate hikes are coming anyway,” said Oliver.

“In terms of the election, the RBA will now look more political not to go in May given the surge in inflation.” Oliver said.

Oliver also anticipated another hike from the RBA in June, of an additional 0.25%, as well as forecasting the cash rate to reach 1.5% by the close of 2022.

Capital Economics senior economist Marcel Thieliant said the RBA may opt for a 50bp hike at its June meeting.

“Trimmed mean inflation is now higher than at the start of any tightening cycle since the full-fledged launch of inflation targeting.

“To be sure, we still expect the Bank to wait until its June meeting before hiking interest rates as it has pledged to wait for the release of the Q1 wage figures later this month and a move before the federal election on 21st May is unlikely.

“But the latter means that the Bank is increasingly behind the curve. With headline inflation now on track to surpass 6%, the Bank may opt for a 50bp hike in June.” Thieliant said.

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