Soaring inflation means interest rates could rise next week as the cost of living rises the most since the GST

Consumer prices have risen the most in more than 20 years, with the cost of living rising 5.1% over the past year.

The last time inflation was this high was in June 2001, when prices rose by 6.1%, largely due to the recently introduced 10% goods and services tax .

You have to go back to December 1995 to find an equally high figure (5.1%) which was not affected by the introduction of the GST.

Australian consumer prices jumped 2.1% in the first quarter of this year alone, according to the latest data from the Bureau of Statistics (ABS).

Critically, the Reserve Bank’s preferred measure of inflation, which excludes the most extreme price movements, came in at 3.7%, well above its 2-3 target. % and adds to the pressure for interest rates to start rising as soon as next week.

It was the highest annual level of so-called core inflation since March 2009, just before the Reserve Bank began its final round of interest rate hikes between October 2009 and November 2010.

The official cash rate target peaked at 4.75% in the month.

May “in play” for a rate hike

Capital Economics’ Marcel Theiliant said one of the key quarterly core inflation figures was 1.4%, the highest since 1990.

“Adjusted average inflation is now higher than at the start of any tightening cycle since the launch of full-fledged inflation targeting,” he noted.

“Of course, we still expect the bank to wait until its June meeting before raising interest rates, as it has committed to awaiting the release of first quarter payroll figures later this month. and a decision before the May 21 federal election is unlikely.

Other economists are no longer so sure that a rate hike next week is out of the question.

“Much of the inflation seen in the quarter is related to supply-side disruptions that the RBA would typically ‘ignore’,” observed Sean Langcake of BIS Oxford Economics.

“But the growing magnitude of inflationary pressures and growing upstream disruptions in China mean that May’s board meeting is in play for a rate hike.”

The ABC is sticking to its long-held forecast of a rate hike in June, although it now thinks it will be “a toss-up” as to whether that rate hike will be 15 or 40 basis points.

“We recognize that there is a clear risk that the RBA will raise the cash rate at the May board meeting next week,” its economists wrote.

Australia’s CBA economics chief Gareth Aird expects the RBA to wait until June to hike rates, but warns a 40bp hike is likely if that’s the case.(ABC News: Daniel Irvine)

“However, we take at face value the communication from the RBA in the April board minutes released last week. If the RBA lifts the exchange rate at the May board meeting next week , she will have gone back on what she said last week.”

However, ANZ’s economics team concluded that the inflation figures were strong enough to advance their forecast for the first June rate hike to next week.

“We now expect the RBA to rise 15 basis points next week,” they wrote in a note.

NAB is also forecasting a 15 basis point rate hike on May 3, while Westpac is revising its forecast.

On Wednesday afternoon, financial markets were pricing in a 90% chance that rates will rise next week.

Some are even stronger in their views, with George Washington University assistant professor of economics Steven Hamilton arguing for an oversized rate hike when the RBA board meets on Tuesday next week.

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“Based on stronger than expected headline and core inflation figures, the RBA is expected to raise rates by 0.4 [percentage points] next week – failing to do so risks coming across as swayed by the election,” he tweeted.

“If they delay and inflation gets worse, that would be a very bad image.”

Which prices have increased the most?

The ABS said the main contributors to the 2.1% price increase in the quarter were a 5.7% increase in construction costs for new homes, an 11% increase in fuel prices and a 6.3% increase in tuition fees in higher education.

The rise in new home prices is the result of a combination of rising building material and labor costs in the construction industry, and the phasing out of the HomeBuilder government subsidy that previously protected customers of this cost increase.

Fuel prices have risen for the seventh consecutive quarter, with the largest annual increase since Iraq’s invasion of Kuwait in 1990.

ABS recorded a record price of $1.83 per liter of unleaded gasoline in the March quarter, although gasoline prices fell slightly in the current quarter due to a reduction temporary halving of the government’s fuel excise duty for six months, saving motorists about 22 cents per litre.

ABS said the rise in university fees reflected the continued impact of federal government changes to student contribution brackets and fees introduced last year.

Food prices also rose significantly, which the ABS said was due to a combination of rising transport, fertilizer, packaging and ingredient costs, as well as disruptions related to COVID and the coronavirus. restocking of animals in a favorable climate.

Vegetables (up 6.6%), soft drinks and juices (up 5.6%), fruits (up 4.9%) and beef (up 7.6% ) contributed the most to the 2.8% quarterly rise in food prices.

Overall, grocery prices jumped 4% in the first three months of the year as state government Dine and Discover vouchers led to lower price increases for restaurants and takeaways.

Quarterly and annual increases in grocery prices have been a major source of inflation.
Quarterly and annual increases in grocery prices have been a major source of inflation.(Supplied: ABS)

Many other grocery items, such as toilet paper and paper towels, also saw strong price increases in the quarter.

While the soaring cost of goods (up 6.6%) drove most of the price increases over the past year, the cost of services also increased by 3%, which will be of some concern to the RBA as it indicates strong domestic price pressures and not just supply bottlenecks.

A concern for many households will be the 6.6% rise in the cost of essential goods and services over the past year, more than the rise in prices of non-essential purchases.

The increase in the cost of essential goods and services was more than twice that of the cost of discretionary items.
The increase in the cost of essential goods and services was more than twice that of the cost of discretionary items.(Supplied: ABS)

Business owners warn of further price hikes

Further price hikes look likely, with many companies signaling that they will soon have to pass on rising costs to their customers.

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Food maker SPC forced to pass on rising costs(Rachel Pupazzoni)

In Western Australia’s Deep South region, Rockcliffe Winery owner Steve Hall is adding up his growing costs.

“First of all, personnel costs have increased,” he told The Business.

Steve Hall
Rockcliffe Winery owner Steve Hall hasn’t raised prices in two years, but expects he will within the next 12 months.(ABC News: Mark Bennett)

“Freight charges, fuel taxes up 18%, which went up about three weeks ago, winemaking additives up about 20%.

“Everything is going up, certainly nothing is going down. Barrels have gone from $1,200 apiece to $1,800 apiece. So everything has gone up.”

Dr Hall’s winery in Denmark, about 420 kilometers south of Perth, sells wine to large customers, such as Endeavor Group (owner of BWS and Dan Murphy’s), smaller retailers and at his cellar door.

While its costs are rising, it has yet to pass on all of that, yet.

“I think you’ll find that everyone will have to raise prices… I don’t see if there’s really much we can do about it,” he said.

“In about a year, we may have to raise prices.”

If he does, it will be three years since his last price increase.

Rockcliffe Winery also produces wine for other labels and doesn’t charge them even more for the work.

“Not for this year, but we still look at the prices every year because all the equipment goes up in price, the additives go up in price, the yeast and all that, which largely comes from France, which went up about 20 % hundred this year,” Mr. Hall explained.

Meanwhile, its profit margins are falling.

“Most people would run around 30%, but we run less than that, of course, around 15-20% I think,” he said.

“I don’t think we can go below a 10% margin. I think it would be far too difficult to do that.”

Leslie M. Gill