Our take on the latest Consumers price index (Tue 18 Oct 2022)
The CPI rose 2.2% in the September quarter
Property rates up 7.1% in the quarter, fastest rise since 1990
House building costs rise a further 3.3%
The key numbers...
- Inflation blew through expectations, with prices rising 2.2% in the September quarter alone to keep the annual inflation rate up at 7.2% - considerably above market and Reserve Bank expectations.
- The quarterly price increase in September is the fourth largest quarterly inflation movement since 1987. Two of the other three large increases were due to GST increases in 1989 and 2010, and there was also a slightly larger rise in the September 2021 quarter (rounded to 2.2% as well).
- Petrol prices fell 4.5% in the September quarter, providing a minor restraint to an even higher inflation result. However, petrol prices remain up nearly 19% from a year ago, and the 2.5% quarterly rise in inflation (excluding vehicle fuels) was the largest movement in this series on record (starting in 1999).
- Food and housing costs drove the increase in inflation this quarter, with food costs contributing 35% of the quarterly gain and the housing group contributing 31%.
- The cost of building a new house rose 3.3% in the quarter (for a 17% annual rate), and property rates rose 7.1% - the fastest since a 12% increase in 1990.
- Non-tradable prices rose 2.0% in the September quarter, taking domestically focused inflation to 6.6%pa on an annual basis – the fastest since 1990.
Stubbornly intense inflation alarming
Annual inflation rate (excluding vehicle fuels)
...and our reaction
- The intensity and stubbornness of high inflation is alarming. The inflation fire is roaring, with much more pricing pressure left in the system than anyone had hoped for. Despite the quarterly decline in fuel prices, annual inflation barely moved, and the faster increases in the non-tradable inflation and inflation excluding vehicle fuel series underscore that there is broad and pervasive pressure across the economy to raise prices.
- To get inflation back under control will require even more in the way of interest rate increases to cool the economy. With quarterly inflation of 2.2%, compared to the Reserve Bank’s forecast of a 1.4% quarterly rise, the Bank will need to increase the official cash rate (OCR) above our most recent forecast of a 4.5% peak.
- We now think a 75-basis point increase to the OCR is necessary in November 2022, ahead of a three-month break, to get ahead of (or more realistically try and catch up to) inflation.
- There are no signs that pricing pressures are easing off. Increases in early childhood education (fastest since 2011) and household utensils, combined with the expected large increases to food, rent, building costs, and rates, all strengthen our concerns that inflation is broad-based and difficult to unwedge. The lower exchange rate will further add to imported (tradable) inflation, but it’s domestic pricing pressures that are of most concern.
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