Australian inflation jumps in Q4, market expects rate hikes – Reuters

A customer looks at products marked with reduced prices on display at a pharmacy in a shopping center in central Sydney, Australia, July 25, 2018. REUTERS/David Gray

SYDNEY, Jan 25 (Reuters) – Core inflation in Australia hit its fastest annual pace since 2014 in the December quarter as fuel and housing costs put widespread pressure on prices, a shock which will fuel market speculation of an early rise in interest rates.

Data from the Australian Bureau of Statistics released on Tuesday showed the headline consumer price index (CPI) rose 1.3% in the fourth quarter and 3.5% for the year, beating forecasts.

The trimmed average measure of core inflation favored by the Reserve Bank of Australia (RBA) jumped 1.0% in the quarter, the biggest increase since 2008.

The annual pace accelerated to 2.6%, above both the 2.3% forecast and the middle of the RBA’s 2-3% target range.

This will come as a surprise to the RBA, which expected core inflation not to reach 2.5% before the end of 2023, a major reason why it did not plan to raise rates this year. .

That outlook will now be harshly challenged when the RBA board meets on February 1. Analysts generally assume he will keep rates at 0.1%, but may well end bond purchases, as part of his quantitative easing campaign.

“The RBA is almost certain to end its asset purchase program at its meeting next week,” said Ben Udy, an economist at Capital Economics. “Our forecast of firming wage growth over the course of this year means the Bank should have enough evidence to raise rates by November.”

The rising cost of living, coupled with exorbitant housing prices, is also shaping up to be a political bone of contention in the national elections scheduled for May.

The ABS noted a homebuilding boom combined with material and labor shortages to drive the biggest increase in new home prices in two decades.

Tuesday’s data emboldened markets, which had long bet that the RBA was behind the inflation curve and expected to tighten early, possibly even by May this year.

A rise to 0.25% is fully priced in by June, along with three more moves to 1.0% by the end of the year.

MONITORING SALARIES

The RBA had argued that inflation was not yet a problem for Australia, still being less than half the levels seen in the United States or the United Kingdom.

Soaring energy and used car prices have been major contributors to US inflation, but power costs have actually fallen in Australia as ABS does not include used cars in his CPI.

Wages were also tighter in Australia, with annual growth of just 2.2%, less than half the pace of the US and UK.

Still, unemployment fell much faster than expected to its lowest level since 2008 at 4.2%, near lows that have driven wages up in the past.

A recent explosion in coronavirus cases has complicated the picture, limiting consumer spending but also causing supply bottlenecks that could add to inflationary pressures.

A NAB business survey on Tuesday showed confidence plummeted in December, even as sales held up reasonably well, while costs rose at the fastest pace in years. Read more

“With significant disruption to supply chains and labor markets, pricing pressures are to be expected and the key question will be how quickly, if at all, these pressures will ease over the coming months. coming months,” said NAB Chief Economist Alan Oster.

Reporting by Wayne Cole; Editing by Christian Schmollinger and Sam Holmes

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