November monthly CPI lifts to 7.3%. What does this mean for interest rates?

Key takeaways

Monthly inflation increases from October lows of 6.9% to 7.3% in November.

Increases in housing (9.6%), food (9.4%), and transport (9%) were the main contributors.

This monthly data is not the full CPI data that the RBA will be relying on for its interest rate decision - this come out on January 26th.

Now virtually every economist is forcasting a sharp deceleration of inflation in Australia, and the world for that matter from what will be seen as a peak at the end of 2022.

The only debate is the magnitude and speed of decline.
This latest data has caused many commentators to forecast an official RBA interest rate rise of 0.25% in February

Inflation rose again in November, according to the latest Australian Bureau of Statistics (ABS) figures, prompting forecasts of further interest rate hikes in 2023

Michelle Marquardt, ABS Head of Prices Statistics, said

"This month's annual movement of 7.3 per cent compares to 6.9 per cent in October and 7.3 per cent in September, indicating ongoing inflationary pressures."

But remember...

These stats are for November and it's now January.

And most commentators felt inflation would keep rising, possibly by as much as 8%, until the end of the year.

Now virtually every economist is forcasting a sharp deceleration of inflation in Australia, and the world for that matter from what will be seen as a peak at the end of 2022.

The only debate is the magnitude and speed of decline.

This is not the full CPI

It's important to realise that this Monthly Indicator is not the full CPI and important updates on some key financial and personal services categories remain to be seen.

The key for the RBA will be the full Quarter 4 CPI on 25 January.

The rate of inflation is the main factor the Reserve Bank of Australia has been taking into consideration when deciding how fast and far to lift interest rates, and the latest monthly data showed there were still ongoing inflationary pressures in the economy.

Based on today’s data and alongside strong retail sales, the NAB suggests the RBA could hike rates by 25 basis points in at least February and maybe March.

But other commentators only see one further interest rate hike ahead.

Real Estate Institute of Australia president Hayden Groves noted the stats pointed to the monthly CPI figure peaking, and the sustained decline in inflation predicted by the RBA in its December 2022 minutes may have begun.

He believes that the latest data means:

“it is time for the RBA to ease up on its interest rate hikes at its first meeting in 2023 in February”.

The most significant contributors to the annual rise in November were:

• Housing (+9.6 per cent),
• Food and non-alcoholic beverages (+9.4 per cent),
• Transport (+9.0 per cent),
• Furniture, household equipment and services (+8.4 per cent) and
• Recreation and culture (+5.8 per cent).

Ms Marquardt said,

“The Housing group was the main contributor to the annual increase in the November monthly CPI indicator.

High labour and material costs contributed to the annual rise in new dwelling prices (+17.9 per cent) although, the rate of price growth for new dwellings has eased compared to the 20.4 per cent annual rise seen in October."

Core measures also accelerated

Mr Taylor Nugent, Markets Economists at NAB commented:

"NAB does not think today’s data will do much to shift the RBA’s assessment of the inflation backdrop, though some of the detail is consistent with growing confidence that some of the sectoral drivers of the initial inflation surge are turning disinflationary.

Key for the RBA remains the outlook for wages growth, the extent to which wage and price setting behaviour has shifted, and what this means for whether inflation will fall sustainably back to target.

Key for this assessment will be the evolution of wages growth (watch the WPI and National Accounts) and market services inflation.

We continue to see the RBA raising rates by 25bp in February and March."

New dwelling inflation continues to slow

New dwelling inflation slowed further to just 0.1% month on month.

This is the largest component of the basket and at its current pace is set to subtract about 4-tenths from quarterly Quarter 4 CPI relative to Quarter 2.

Rents inflation also slowed in the month…

Interestingly, rents slowed sharply in the month to just 0.2% month on month from 0.6% month on month.

There is still a large gap between still rising advertised rents and CPI rents and we don’t expect that slowing to persist.

Inflation is elevated across CPI categories in year-on-year terms

Travel and accommodation bucked the usual November seasonal fall to be up 4.3% month on month on higher airfares and strong holiday demand after a surprising decline last month weighed on the index.

Implications moving forward

Mr Taylor Nugent, Markets Economists at NAB commented:

Looking forward, the key goods and construction drivers of the initial inflation surge are at or past their peaks and are set to be disinflationary through 2023.

The large new dwelling’s component rose just 0.1% month on month in November, compared to a monthly pace of around 2% earlier in the year.

At that pace, new dwellings alone will subtract 0.5ppt from the headline and 0.2ppt from trimmed mean inflation relative to H1 2022.

Improved supply chains and the slowing in construction cost inflation add further confidence in our expectation for disinflation through 2023.

For monetary policy though, more important than the height of the peak and the house construction cycle is the extent stronger labour cost and earnings growth support broader more persistent inflation pressures.

Source of Charts: NAB using ABS data

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