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Peak CPI

Today’s Consumer Price Index (CPI) release for the December 2022 quarter confirmed that inflation still sits well above the RBA’s target band for inflation – increasing by 7.8% through the year, and by 1.9% in the quarter. Underlying (trimmed mean) inflation grew by 1.7% through the quarter and 6.9% through the year.

This is the highest inflation has been since 1990 and confirms that Australia’s inflation rate was still rising through to late 2022 (unlike the US, for example, where it has started to move down).

Source: ABS Consumer Price Index

The most significant contributors to the quarterly increase were travel costs, with both domestic (13.3%) and international travel prices (7.6%) increasing notably. Electricity prices were also a key contributor, increasing by 8.6% in the December quarter. While grocery prices overall kept rising, there was some respite – fruit and vegetable prices dropped by 7.3% in the quarter.

There are signs that the inflation story is broadening. Service prices grew faster in the quarter (2.1%) than goods prices (1.6%), the first time this has occurred since December 2020. In year-ended terms, good prices have still increased faster (9.5%) than services prices (5.5%).

By state prices grew markedly quicker in Perth, increasing by 3.6% in the December quarter, elevated by the end of electricity rebates in WA. Adelaide however had the highest annual inflation (8.6%), followed then by Perth (8.3%) and Melbourne (8.0%).

For Australia’s inflation problem, today’s read may be as bad as it gets. The Reserve Bank has been on an inflation warpath since May. Yet, it still had very little influence on today’s numbers. But that story starts to change in 2023.

Global energy prices and supply chain disruptions have eased considerably from their peak in early 2022 and will soon be acting to pull prices down.

At home, a moderation in consumer demand is also expected to put downward pressure on prices. The latest edition of Business Outlook discusses the strength of the consumer in rebounding out of the pandemic lockdowns, which also fuelled Australia’s strong economic growth in the last 12 months. However, it’s also an important reason why Australian economic growth is expected to slow dramatically throughout 2023.

Source: ABS, Deloitte Access Economics Business Outlook

With the combination of high inflation, rising interest rates, falling house prices, low levels of consumer confidence and negative real wage growth, spending growth is expected to decelerate markedly over coming months.

The Reserve Bank has consumers in a pincer movement. The rapid shift up in interest rates means that mortgage repayments, including principal and interest, are already on track to rise to a record high as a share of household disposable income. Yet, at the same time, real household disposable income per capita is falling. That combination means consumer spending in real terms is expected to fall over the next six months in Australia.

Today’s CPI result, on the high side of market expectations, will increase pressure on the Reserve Bank to further lift rates in February. It needn’t do so – much of last year’s higher rate ammunition still needs to work its way through.

This blog was co-authored by Talia Scott-Hayward, a Vacationer in the Deloitte Access Economics team.