Australian annual headline inflation printed with a 5 handle in the March quarter for the first time since 2008, while underlying inflation on the trimmed mean measure accelerated above the top end of the RBA's target band to a 13-year high at 3.7%. The light has turned green for the RBA Board to start its hiking cycle at next week's meeting, lifting the cash rate target by 15bps to 0.25%.
Consumer Price Index — Q1 | By the numbers
- Headline CPI printed 2.1% in Q1, stronger than the 1.7% pace expected and up from 1.3% in Q4. The seasonally adjusted CPI was up 2%q/q, lifting the annual pace from 3.6% to 5.2%.
- The underlying CPI measures (seasonally adjusted) came in either side of estimates but are now above 3% in annual terms:
- Trimmed mean was 1.4%q/q (vs 1.2%), with the annual rate up at 3.7% (vs 3.4%) from 2.6%.
- Weighted median posted at 1.0%q/q (vs 1.2%), with the year-on-year rate rising from 2.5% to 3.2% (vs 3.3%).
Consumer Price Index — Q1 | The details
As seen globally, consumer price inflation in Australia has accelerated over the first quarter of 2022 with the spillover effects from the war in Ukraine accentuating existing supply/demand imbalances. Headline inflation on both the quarterly (2.1%) and annual rates (5.1%) saw their fastest increases since the introduction of the GST in 2000. Reflecting a broad-based rise in price pressures across the economy, trimmed mean underlying CPI lifted sharply in Q1 (1.4%q/q) to 3.7%Y/Y and is above the RBA's 2-3% target band for the first time in 12 years.
Surging fuel prices (11%q/q) and higher base prices for new dwelling construction (5.7%q/q) with the HomeBuilder grants scheme winding down remained major drivers of headline inflation, while food prices lifted 2.8%q/q to add a new material impulse to inflation on the back of higher fertiliser and transport costs and supply-related disruptions. Were it not for the pandemic recovery dining-out voucher schemes in Sydney and Melbourne, food prices would have risen by more. All up, fuel, new dwellings and food accounted for three-quarters of the rise in quarterly headline inflation. Outside of these drivers, education costs lifted 4.5%q/q to make a sizeable contribution to quarterly CPI due to the recalibration of tertiary fees.
With the Ukraine war leading to supply disruptions, Australian fuel prices posted an 11% surge in Q1 to be up 35.1% over the year. This alone has contributed 1.3ppts to headline inflation over the past year. There will be a pullback in Q2 due to the excise tax cut announced by the federal government in its recent Budget.
New dwelling costs continue to rise as the dampening effect on developers' base prices from the HomeBuilder grants scheme winds down and as the very large pipeline of residential construction work drives ongoing materials and labour shortages. In the quarter, new dwelling prices were up 5.7% and surged to 13.7%Y/Y. Rents saw their fastest quarterly rise in more than 7 years (0.6%q/q). Although the annual pace is modest (1.0%), this will rise slowly reflecting the tightening in capital city rental markets and will become a driver of inflation.
Food prices overall increased by 2.8% in the quarter to be up by 4.3% over the year. This leaves annual food inflation at its fastest since Q3 2011. Strong quarterly increases were seen in meats and seafoods (4.8%), fruit and vegetables (5.8%) and non-alcoholic beverages (5.9%).
Where there was some relief for consumers was in durable goods, with price pressures easing after supply/demand imbalances had driven strong increases over the pandemic recovery. There were price declines in the quarter in furniture and furnishings (-2.5%), clothing and footwear (-0.6%) and AV equipment (-0.2%). Meanwhile, new vehicle costs continued to rise but at a more moderate pace (1%) than in recent quarters.
Consumer Price Index — Q1 | Insights
Australian CPI came in well above expectations in the March quarter with the effects of the Ukraine war accentuating existing supply constraints amid strong domestic demand conditions. Underlying inflation has accelerated above the top of the RBA's 2-3% target band for the first time since 2010 ahead of next week's Board meeting, where it will also have a new set of economic forecasts to factor into its decision. Although the Board has stressed the importance of the upcoming wage data (due 18 May), I think today's CPI data will prompt the Board to change course and deliver its first rate hike for the cycle next week, lifting the cash rate target by 15bps to 0.25%.