Australian inflation came in stronger than expected in the December quarter driven by rising fuel and new dwelling costs, while global supply chain pressures and reopening effects post the Delta lockdowns were key contributors. A rise in underlying inflation to 7-year highs points to a broadening of price rises and should see the RBA winding up its QE program at next week's meeting.
Consumer Price Index — Q4 | By the numbers
- Headline CPI was 1.3% in Q4, stronger than the 1.0% pace expected and up from 0.8% in Q3. Seasonally adjusted CPI was also 1.3% in Q4. Annual headline CPI increased to 3.5% from 3.0% (vs 3.2% expected) while the seasonally adjusted measure lifted to 3.7% from 3.0%.
- The underlying CPI measures (seasonally adjusted) printed above consensus and lifted above the midpoint of the RBA's 2-3% target band for the first time since 2014:
- Trimmed mean was 1.0%q/q (vs 0.7%), with the annual rate up from 2.1% to 2.6% (vs 2.3%).
- Weighted median lifted 0.9%q/q (vs 0.7%), with the year-on-year rate rising to 2.7% (vs 2.3%) from 2.2%.
Consumer Price Index — Q4 | The details
December quarter inflation surprised to the upside as price pressures showed signs of broadening. Headline inflation was 1.3% in the quarter and, as in Q3, was mainly driven by rising fuel prices and new dwelling costs being pushed up due to the fading effect of the HomeBuilder scheme and materials and labour shortages. However, as the chart shows, a broader range of price increases came through than in Q3. Reopening effects from the Delta lockdowns were the key factor behind this as domestic and international travel costs lifted sharply following eased border restrictions, while demand for dining out rebounded strongly and was supported by the NSW government's voucher scheme. Meanwhile, supply constraints and strong demand pushed up prices for many consumer durable items.
The key CPI aggregates highlight the broad-based nature of the rise in inflation. Headline inflation (3.5%) is stronger than the underlying pace, which mainly reflects the impact of higher fuel prices, but the measures for the latter have risen to their fastest since 2014 and are above the midpoint of the RBA's 2-3% target band. The key trimmed mean measure was up at 2.6% on the back of its strongest quarterly rise (1.0%) since 2008. Core goods prices (2.6%Y/Y) accelerated amid supply chain pressures and core services inflation increased at its fastest in 7 years as the Delta lockdowns ended. Price pressures in traded goods (1.4%) were similar to non-traded goods (1.2%) in Q4, but in annual terms, the former is substantially higher (4.9% to 2.8%) boosted by the resurgence in global energy prices.
Looking into the key components and the housing group CPI lifted by 1.8% in Q4 and 4% over the year. New dwelling costs surged by 4.2%q/q after rising by 3.3% in Q3. With fewer HomeBuilder grants now being applied against builders' base prices after the scheme ended earlier in the year, construction costs have effectively increased. Materials and labour shortages have also added to price pressures. Meanwhile, the pace of inflation in rents remains subdued at 0.4%Y/Y. Rents in Sydney (-1.9%Y/Y) and Melbourne (-1.1%Y/Y) remain in decline but are rising in the other capitals, notably in Brisbane (7.2%Y/Y) and Perth (7.9%Y/Y)
The transport group CPI posted a 2.8%q/q rise to be 12.6% higher over the year. Predominantly, this reflects a continued rebound in fuel prices from the depths of the pandemic in 2020. Domestic fuel prices reached a record level in Q4 after rising by 6.6% in the quarter. Over the past year, fuel prices are up 32.3% and have alone contributed one-third of the increase in annual headline inflation.
As earlier alluded to, reopenings from the Delta lockdowns boosted inflation. In particular, international (16.3%) and domestic travel (4.8%) costs increased sharply in the quarter as border restrictions started easing. Meanwhile, the return of dining out saw restaurant and cafe prices rise by 1% in Q4, though the effect of the NSW government's voucher scheme prevented a larger increase from being recorded. Sporting and recreation activities prices were broadly flat in the quarter, but the annual pace at 4% is stronger than in the years leading up to the pandemic.
Pressures in global supply chains amid a period of robust demand from Australian households have pushed up prices for consumer durables. Clothing and footwear prices rebounded by 2.6% in the quarter following widespread discounting in Q3 as retailers were trying to clear winter inventory that had accumulated during the lockdowns. In recent years, Black Friday discounting has seen clothing and footwear prices fall in Q4. The global shortage in semiconductors continued to put upward pressure on new vehicle (1.9%) and AV equipment (0.6%) prices in Q4. Furniture and furnishing prices rose at a slower pace in Q4 (1.1%) but are up by a strong 5% over the year.
Food prices were more contained than anticipated rising by 0.7% in the quarter and by 1.9% over the year. The main reason for this was that fruit and vegetable prices fell further (-0.7%) after Q3's 3.5% decline. Fruit prices were down 1.2% on the quarter on an increased supply of berries and bananas, while vegetable prices softened by 0.4%.
Consumer Price Index — Q4 | Insights
There remains a lot of volatility in the inflation data. Around half of the rise in annual inflation can be attributed to fuel and new dwelling costs, while reopening effects were a significant contributor in the December quarter. These drivers will fade over time, but the main point to take out of today's report is the firming in underlying inflation to 7-year highs. At 2.6%, the trimmed mean has reached a pace the RBA's November forecasts did not anticipate until the end of 2023. With the labour market tightening more rapidly than it expected, the RBA discontinuing its QE program in February appears a done deal. Following the lead of many of its global peers, the RBA might be about to turn more open to the idea of raising rates in 2022.