Australian inflation has accelerated to a 21-year high, peak still to come

  • Q2 CPI rose 1.8% qoq, 6.1% y/y slightly below expectations
  • Core inflation up 4.9% y/y versus RBA target of 2-3%
  • RBA sees 50 basis points higher next week, lower chance of 75 points per second

SYDNEY (Reuters) – Australian inflation accelerated to a 21-year high in the last quarter and is likely to accelerate further as food and energy costs explode, fueling speculation that interest rates will need to more than double to control the outbreak.

Wednesday’s dismal report comes just a day before Treasury Secretary Jim Chalmers updates the previous government’s budget forecast, and is already warning that inflation will get worse before it gets better.

“It’s going to be a showdown,” Chalmers told reporters about the update. “The rate of inflation is going up dramatically, growth is going down, and all the implications of that.”

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Data from the Australian Bureau of Statistics showed that the Consumer Price Index (CPI) jumped 1.8% in the June quarter, slightly below market expectations of 1.9%.

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

The closely watched measure of core inflation, the discounting average, rose 1.5% in the quarter, taking the annual pace to the highest level since the series began in 2003 at 4.9%.

This has pushed core inflation away from the RBA’s target range of 2-3% and boosted expectations that it will raise the liquidity ratio by 1.35% by 50 basis points at its August 2 policy meeting.

Markets are leaning against the RBA’s 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, was misled by the rapid recovery in inflation and had already had to raise interest rates three times, the tightest measure in decades.

narrow road

This is one of the reasons why the recently elected Australian Labor government launched an independent review of the Reserve Bank of Australia to see if its policies and governance need updating. Read more

Reserve Bank of Australia Governor Philip Lowe indicated that interest rates will likely continue to rise towards the “neutral” level of at least 2.5%, while markets have posted rates as high as 3.75%.

“The challenge now is to calibrate how much tightening is needed,” said Paul Bloxham, head of Australian economics at HSBC, noting that “neutrality” was a moving target and hard to achieve in practice.

“Working too hard from here could lead to a recession – too little, an ongoing inflation problem,” he warned. Really narrow road.

The biggest challenge is that most of the pulse of inflation is global and beyond the control of the Reserve Bank of Australia. The CPI gauge of gasoline prices reached a record peak for the fourth consecutive quarter, while supply chain problems and rising freight costs pushed commodity inflation to its highest levels since 1987.

While gasoline prices have fallen in recent weeks, market turmoil has increased the cost of electricity and gas, while widespread flooding has pushed up the price of fresh food.

As a result, analysts fear CPI inflation will reach 7%, or even 8%, by the end of the year, and fear it will become an integral part of wage and price expectations.

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

Market measures of future inflation are further contained, with bond yields clearly indicating a future economic slowdown but, so far, no recession.

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Reporting from Wayne Cole. Editing by Himani Sarkar and Sam Holmes

Our Standards: Thomson Reuters Trust Principles.

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