The Consumer Price Index (CPI) rose 1.9% in the December 2022 quarter, according to the latest data from the Australian Bureau of Statistics (ABS).
Annual inflation was 7.8%, close to the Reserve Bank of Australia forecast that headline inflation would peak at 8% over the year.
More importantly, underlying core inflation (the RBA’s preferred reading on inflation), which is measured by trimming excessively volatile components of CPI, actually fell in the quarter, from 1.9% in September to 1.7%.
Despite headline figures surprising to the upside this quarter, the worst of inflation could be behind us.
Annual core inflation is still a long way from the 2-3% target range set by the RBA, however December marked the first fall in quarterly core inflation since March 2021, following eight consecutive interest rate rises from May 2022.
This increase in the CPI, which measures the change in the price of a basket of goods and services consumed by households, will be one of the many factors the RBA takes into account when it decides whether or not to raise interest rates at its February meeting.
Despite headline figures surprising to the upside this quarter, the worst of inflation could still be behind us.
Inflation across the combined OECD slowed to 1.8% in the September 2022 quarter, after peaking at 2.1% through June.
Forecasts from the OECD also suggest a fall in inflation through 2023 across most major economies, as global economic demand starts to slow.
Michelle Marquardt, ABS head of prices statistics, said:
"This is the fourth consecutive quarter to show a rise greater than any seen since the introduction of the Goods and Services Tax (GST) in 2000.
The increase for the quarter was slightly higher than the quarterly movements for the September and June quarters last year (both 1.8 per cent)."
The most significant contributors to the rise in the December quarter were:
- Domestic holiday travel and accommodation (+13.3 per cent),
- Electricity (+8.6 per cent), and
- International holiday travel and accommodation (+7.6 per cent).
"Strong demand, particularly over the Christmas holiday period, contributed to price rises for domestic holiday travel and international airfares," Ms Marquardt said.
She further commented:
"The rises seen for domestic and international travel were notably higher than historical December quarter movements."
The main factor influencing the rise in electricity prices was the unwinding of the $400 electricity credit offered by the Western Australian Government to all households last quarter.
This was partially offset by the ongoing impact of the Queensland Government's $175 Cost of Living rebate from September 2022, and the introduction of the Tasmanian Government's $119 Winter Bill Buster electricity discount for concession households."
Growth in prices for New dwellings (+1.7 per cent) slowed relative to recent quarters (+3.7 per cent in September and +5.6 per cent in June) but remained stronger than historic norms.
Ms Marquardt explained:
"Labour and material costs are driving price growth in this area, with signs of material cost pressures easing.
Slowing demand for new dwelling construction was reflected in a lower quarterly rate of inflation for new dwellings this quarter compared with the past five quarters".
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Food prices continued to rise, driven by Meals out and takeaway foods (+2.1 per cent) as dining establishments pass through rising costs for inputs including ingredients and labour.
Vegetables (-10.2 per cent) partially offset the rise, as the effects of unfavourable weather earlier in the year eased.
Annually, the CPI rose 7.8 per cent, with New dwellings (+17.8 per cent), Domestic holiday travel and accommodation (+19.8 per cent) and Automotive fuel (+13.2 per cent) the most significant contributors.
"The annual increase for the CPI is the highest since 1990. Annual inflation for goods such as new dwellings and automotive fuel steadied this quarter, however, we saw an uptick in inflation for services such as holidays and restaurant meals," Ms Marquardt said.
The annual price increase for services (+5.5 per cent) was the highest since 2008, while goods (+9.5 per cent) showed little change from the last quarter.
The annual price increase of discretionary goods and services (+7.1 per cent) moved closer to that of non-discretionary goods and services (+8.4 per cent) compared with recent quarters.
Underlying inflation measures reduce the impact of irregular or temporary price changes in the CPI.
For the third consecutive quarter, annual trimmed mean inflation was the highest since the series commenced in 2003, increasing to 6.9 per cent, up from 6.1 per cent in the September quarter.
Eliza Owen, head of research at Corelogic explains:
The extent to which inflation slows down in 2023 will determine whether the RBA needs to keep tightening, or can hit pause on rate hikes.
Therefore, the inflation outlook remains important to the housing outlook.
In the year ahead, inflation may be subject to the competing forces of falling global demand, but rising demand from China as the country moves away from zero COVID.
The potential for extreme weather events should also be kept in mind, as this can impact production capacity, and lead to inflation spikes.
Given the slightly stronger than expected headline inflation result for December, along with the fact that core inflation remains well outside the RBA’s target range, a further increase in interest rates seems likely for February, and possibly March.
This will likely mean further falls in housing demand and values in the months ahead.
However, with inflation potentially moving through a peak, we are likely to see interest rates peak lower than some forecasters were expecting last year.
Once interest rates stabilise, we would expect consumer sentiment to improve alongside a gradual stabilisation in housing prices.
The ABS also released the monthly CPI indicator for December.
The monthly indicator rose 8.4 per cent in the 12 months to December, following annual rises of 7.3 per cent in November and 6.9 per cent in October.
Ms Marquardt said:
"The monthly indicator recorded the largest annual rise in the series in December.
The most significant contributors in the 12 months to December were New dwellings, up 16.0 per cent, and Holiday travel and accommodation, up 29.3 per cent.
Airfare and accommodation prices rose in response to strong demand over the Christmas holiday period."
Source of charts and commentary: ABS