Australian inflation hits 21-year high, peak yet to come

  • Q2 CPI rose 1.8% q/q, 6.1% y/y just below forecast
  • Core inflation up record 4.9% YoY vs RBA target of 2-3%
  • RBA seen 50bps rise next week, 75bps less chance

SYDNEY, July 27 (Reuters) – Australian inflation hit a 21-year high in the last quarter and is expected to pick up further as food and energy prices soared, fueling speculation, interest rates will need to more than double to bring the outbreak under control.

Wednesday’s grim report comes just a day before Treasurer Jim Chalmers will update the previous government’s budget forecast, and he’s already warning that inflation will get worse before it gets better.

“It will be confrontational,” Chalmers told reporters during the update. “Inflation revised up substantially, growth revised down and all the implications that entails.”

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Data from the Australian Bureau of Statistics showed the consumer price index (CPI) jumped 1.8% in the June quarter, just below market forecast of 1.9%.

The annual rate rose from 5.1% to 6.1%, the highest since 2001 and more than double the rate of wage growth.

A closely watched measure of core inflation, the trimmed average, rose 1.5% in the quarter, bringing the annual pace to the highest since the series began in 2003 at 4.9%.

This pushed core inflation away from the Reserve Bank of Australia’s (RBA) 2-3% target range and bolstered expectations that it would hike the 1.35% cash rate by 50 basis points. at a political meeting on August 2.

Markets are tilting against an RBA move of 75 basis points, although the US Federal Reserve is expected to rise by a similar amount later on Wednesday.

The RBA, like many central banks, has been caught off guard by the rapid recovery in inflation and has already had to raise rates three times, the most aggressive tightening in decades.

A NARROW PATH

This is one of the reasons why Australia’s recently elected Labor government launched an independent review of the RBA to see if its policies and governance needed updating. Read more

RBA Governor Philip Lowe has indicated that rates will likely continue to rise towards a “neutral” level of at least 2.5%, while markets have forecast up to 3.75%.

“The challenge now is to calibrate the amount of tightening that will be needed,” said Paul Bloxham, head of Australian economy at HSBC, noting that “neutral” was a moving target and difficult to achieve in practice.

“Going too hard from here can lead to a recession – too little, a lingering inflation problem,” he warned. “A narrow path indeed.”

The challenge is all the greater as much of the pulse of inflation is global and beyond the control of the RBA. The CPI’s measure of gasoline prices hit a record high for the fourth straight quarter, while supply chain issues and rising shipping costs saw goods inflation hit the most high since 1987.

While petrol has calmed down in recent weeks, market disruptions are driving up the cost of electricity and gas, while widespread flooding has pushed up fresh food prices.

As a result, analysts are concerned that CPI inflation could top 7% or even 8% by the end of the year and could feed into wage and price expectations.

Alarmingly, an ANZ survey released this week showed that consumers now expect inflation to stand at 6% over the next two years.

Market measures of future inflation are more contained, with bond yields clearly signaling a coming economic slowdown but, for now, no recession.

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Reporting by Wayne Cole; Editing by Himani Sarkar and Sam Holmes

Our standards: The Thomson Reuters Trust Principles.

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