(Bloomberg) -- Australia’s annual headline inflation accelerated to a 32-year high in the third quarter, validating the Reserve Bank’s rapid policy tightening and prompting a jump in government bond yields.
The consumer price index advanced 7.3%, the strongest reading since 1990 when the RBA hiked so aggressively it tipped the economy into recession, data showed Wednesday. Core inflation surged 6.1% last quarter for the highest trimmed-mean measure since the series began in 2003.
Three-year government bonds and longer-dated paper sold off following the result that supports Treasurer Jim Chalmers’ fiscal restraint in Tuesday’s budget as he sought to avoid adding to demand. It also reinforces the RBA’s determination to keep hiking after 2.5 percentage points of moves since May.
The result prompted economists at AMP Capital Markets to raise their forecast policy peak to 3.1% from 2.85%.
“The trimmed mean missed by quite a large amount,” said Diana Mousina at AMP. “The risk is it will remain well above the RBA’s forecast well into next year. The RBA would likely want to get on top of it sooner rather than later, which is why we think that they’ll front load the rate hikes this year.”
The central bank expects headline inflation will peak at just under 8% by year’s end, underlining its rapid tightening cycle that lifted the cash rate to 2.6% this month from 0.1% in May.
Financial markets and economists are currently predicting two more quarter-point moves this year to 3.1%. Overnight-indexed swaps imply a peak rate of 4.2% in July while economists see a pause around 3.5%.
Australia’s fiscal and monetary policies are broadly aligned. Finance Minister Katy Gallagher told Bloomberg Television on Wednesday that the budget sought to show “some spending restraint in light of this inflation challenge.”
Australia is far from alone in struggling with escalating consumer prices, but is fortunate that wage growth has so far remained contained. That allowed it to break ranks with global counterparts this month and downshift to a quarter-point hike as policy makers elsewhere stick with outsized moves.
The Federal Reserve is expected to raise rates by 75 basis points again next month as it looks to cool inflation pressure. Central banks from the UK to New Zealand are also tightening sharply to rein in prices fueled by pandemic-era stimulus and later supply-chain disruptions.
What Bloomberg Economics Says...
“Stronger-than-expected inflation is unlikely to prevent the RBA from ending its tightening cycle as early as December. The pickup largely reflects temporary shocks, or factors that are likely to subside -- or reverse course -- over coming months.”
-- James McIntyre, economist.
To read the full report, click here
Coles Group Ltd., Australia’s second-largest supermarket, predicts inflation will accelerate further as some of the nation’s prime east coast farmland is inundated by flooding.
“We do expect cost price inflation to increase given suppliers are still seeking further increase to cover their costs and obviously there’ll be some further disruption from the flooding,” Steven Cain, chief executive officer at Coles, said in an earnings call Wednesday.
He also highlighted mounting labor costs, saying “wage increases this year have been higher than they’ve been for quite some time.”
Today’s report also showed:
- The most significant contributors on a quarterly basis were new dwellings, up 3.7%, gas 10.9% and furniture, 6.6% higher, the ABS said.
- Tradables prices, which are typically impacted by the currency and global factors, rose 8.7% from a year earlier. The Australian currency fell more than 7% against the dollar last quarter
- Non-tradable prices, which are largely affected by domestic variables like utilities and rents, advanced 6.5% on the year