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As inflation rises all eyes are now on the wavering RBA

Australia’s inflation rate has predictably increased sharply again over the March quarter to the highest levels reported since the introduction of the GST in 2000 impacted prices.

The ABS reports that the headline CPI increased by 2.1% over the quarter for an annual rise of 5.1% - well ahead of the 1.3% quarterly rise and 3.5% annual rise recorded over the previous December quarter.

Inflation April 2022

The primary drivers of the recent inflationary outbreak remained covid-related increases in the price of fuel and house building costs.

Supply constraints struggling to match demand from covid stimulus policies and the Ukraine war raised the price of oil to record levels over the March quarter; with the government 2021 HomeBuilder initiative driving unprecedented demand for new houses resulting in shortages of labour and materials driving a predictable spike in building costs.

Although CPI has increased sharply over previous quarters, it remains well below the previous severe inflationary outbreaks recorded through the 1980s.

Inflation april 2022

Australia’s inflation rate also remains well below the annual levels recorded recently by similar advanced economies with the US at 8.5%, NZ at 6.9%, Canada, at 6.7% and the UK at 6.2%.

The RBA has indicated that rising inflation in concert with rising wages is a trigger for an increase in official rates – designed to quell demand and cool inflation.

The Bank however has seemingly changed its stance recently, indicating that it is now prepared to act sooner rather than later to increase rates.

That may indicate that its consistently stated precondition for a rate rise - sustained strong wages growth, may no longer apply to its decision-making criteria.

Although record low rates are likely to remain on hold again over May, next week’s RBA meeting commentary and the ABS March quarter Wages Index data to be released on May 19th will be revealing.

An increase in interest rates without appropriate wage increases will spell bad news for household budgets that are now confronting consecutive quarters of real wage declines approaching record low levels.

Inflation april 2022

About Dr Andrew Wilson, Chief Economist of is widely regarded as Australia’s leading property economist.
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