The latest headline inflation figures announced recently for the period to December were higher than expected. This is important because it affects interest rates. They in turn affect most aspects of the economy – home loan rates, business borrowing costs, employment openings, share prices and so on.
The Consumer Price Index (CPI) for the December Quarter was 1.9 per cent and the increase for the year 7.8 per cent. The twelve-month figure to the end of September was 7.3 per cent and analysts had expected a similar reading to December.
This means the RBA may need to raise interest rates further than expected. Some commentators including the writer thought a 0.25 per cent rate rise in February would be the last. That may not now be the case. Extra increases may be necessary to slow demand, and price growth.
There were some encouraging signs in the figures. The 1.9 per cent CPI for the December Quarter was less than the highest Quarter, March last year, of 2.1 per cent.
The Reserve Bank’s preferred measure is core or underlying inflation. It excludes volatile items such as petrol, and fruit and vegetables. It was a lower 6.9 per cent for the year to December, but also above its September level.
It is possible that consumers may have had a final spending spree in the Christmas holiday period before being hit with even bigger loan repayments as past rate rises take effect, meaning their spending will slow from now on. If that is true inflation will have peaked.
A quarter per cent rate increase in February is now assured. After that the RBA will be puzzling over what to do. It will be studying indicators keenly. If there are signs inflation is peaking March may see a rate pause.
The Australian Bureau of Statistics introduced monthly inflation reporting last October, with figures based on most but not all of the data it collects quarterly. So there will be updates in February and March for the RBA to study.
Home loan payments will rise at least a little further. Extra rate hikes will also further increase the cost of capital for businesses, slowing expansion plans. That will likely have some dampening effect on share prices and investment returns.
However the February company reporting season announcing the December half-year results should be quite positive. Business conditions have been good and there are few signs of trouble outside the construction industry.
Even though the December CPI figures were disappointing, inflation is close to its peak, so interest rates don’t have much further to rise. Let’s hope the next few month’s CPI figures bring better news.