Soaring fuel, housing and food costs have pushed Australia’s inflation rate up 6.1 percent for the first time in two decades, fueling fears of an outsized interest rate hike in August.
The CPI rose in the June quarter, the fastest since mid-2001, after unemployment fell to a 48-year low of 3.5 percent last month.
But excluding the one-off effect of GST implementation, Australia’s CPI was the highest since the December 1990 quarter during the first Gulf War.
Key price increases
headline inflation: 6.1 percent
TRANSPORT: 13.1 percent
CASING: 9 percent
FOOD: 5.9 percent
HOUSE FURNITURE: 6.3 percent
Treasurer Jim Chalmers said, “These are numbers that face mortgage rates that will continue to rise.
“It gets harder before it lets up,” he said.
“There will be difficult times ahead of us. We expect it to be even higher.’
Headline inflation is now well above the Reserve Bank of Australia’s 2-3% target, with the latest reading showing a sharp rise from the March quarter’s 5.1%, when petrol prices climbed above $2 a litre.
A tight housing market and higher electricity prices pushed housing costs up 9 percent in the year ended June 30, while transportation costs rose 13.1 percent, while food prices rose 5.9 percent after the recent floods.
“The most vulnerable people are making choices between, you know, veggies or rent, and that’s where it really bites,” said Dr. Chalmers.
Compare Market banking analyst David Ruddiman said these recent high inflation readings mean the RBA is likely to hike interest rates by 75 basis points on Tuesday next week, which would be the biggest monthly hike since December 1994.
Australia’s inflation rate rose by 6.1 percent for the first time in two decades, raising fears of an outrageous interest rate hike in August (pictured a buyer at Paddy’s Market in Flemington, west Sydney).
“Now is the right time for the RBA to pull more cash rate leverage, otherwise we could be considering a longer and much more difficult path back for Australians as the RBA aims for an inflation target of 2-3%. ‘ he said.
Historical inflation rates
JUNE 2022: 6.1 percent
MARCH 2022: 5.1 percent
JUNE 2001: 6.1 percent
DECEMBER 1990: 6.9 percent
JUNE 1990: 7.7 percent
MARCH 1990: 8.7 percent
JUNE 1987: 9.3 percent
MARCH 1987: 9.4 percent
DECEMBER 1986: 9.6 percent
JUNE 1983: 11.1 percent
MARCH 1983: 11.4 percent
SEPTEMBER 1982: 12.4 percent
Annual consumer price index data from the Australian Bureau of Statistics is released quarterly
‘There is a risk that a rate hike of 75 basis points or more in August, followed by back-to-back rate hikes in September, October and November, would result in a very hard landing for the economy at some point of the year.’
A 0.75 percentage point hike in the RBA rate on Aug. 2 would take the cash rate to a seven-year high of 2.1 percent from a three-year high of 1.35 percent.
A borrower with an average $600,000 mortgage would see their monthly payments rise another $256 if the Reserve Bank hiked rates another three-quarters of a percentage point.
Mr Ruddiman predicted the policy rate could reach 3.5 percent by November, a level even higher than the 3.35 percent forecast by ANZ and Westpac.
Australian borrowers have already suffered rate hikes of 1.25 percentage points in May, June and July, the heaviest since 1994.
While Reserve Bank of Australia Governor Philip Lowe spoke about borrowers having buffers to deal with rising mortgage rates, Dr. Chalmers that many have come under pressure.
“Well, there are a lot of comments about people having buffers on their home loans, for example, which I think wrongly assumes that interest rates are going up and that inflation isn’t hurting people,” he said.
“That’s it. For every dollar people spend to service their mortgages, every extra dollar, that means a dollar that cannot be used to fund the skyrocketing costs of other necessities of life. I think we need to look broadly at the impact of inflation on the economy but also on the most vulnerable Australians.
“Many people are living paycheck to paycheck for whom this inflation will be devastating because they will find it increasingly difficult to replace items from their household budget.”
The CPI rose in the June quarter, the fastest since mid-2001, after unemployment fell to a 48-year low of 3.5 percent last month. But excluding the one-off effect of GST implementation, Australia’s CPI was the highest since the December 1990 quarter during the first Gulf War
Treasurer Jim Chalmers said, “These are numbers that face mortgage rates that will continue to rise
ANZ and NAB had both expected figures for the June quarter to show a 6.3 percent annual increase in inflation, which would have been the highest since 1990.
The Commonwealth Bank had forecast a 6.2 percent increase in CPI, while only Westpac among the big four banks correctly forecast a 6.1 percent increase.
The June quarter reading was identical to the 6.1 percent level of the June quarter of 2001, a year after the introduction of the 10 percent GST kept prices high.
But excluding GST’s debut, CPI was the highest since the December quarter of 1990, after Iraq’s invasion of Kuwait sparked the first Gulf War, which led to higher gasoline prices.
dr Lowe has hinted this year that inflation is likely to hit 7 percent by the end of this year, and Dr. Chalmers will release a new ministerial statement on Thursday with updated forecasts from the Treasury Department.
“The predictions are not accurate,” said Dr. Chalmers.
But he added that inflation is likely to be “moderate next year” but “will take a long time to reach normal inflation levels”.
Market banking analyst David Ruddiman said this high inflation means the RBA is likely to hike interest rates by 75 basis points on Tuesday next week (pictured an auction inspection in Melbourne).
Russia’s 2022 Ukraine war in the June quarter pushed average gasoline prices back above $2 a liter, although former Treasurer Josh Frydenberg halved the fuel tax to 22.1 cents a liter for six months in March’s budget.
dr Chalmers ruled out spending another $3 billion on a semi-annual excise halving as gross national debt nears $1 trillion.
“Australians shouldn’t expect us to afford to extend this fuel price break,” he said.
“We have to walk that fine line between responsibly investing in the right growth of the economy and addressing these supply chain issues, while recognizing that every additional dollar borrowed costs more to service.”
Recurring floods in southeast Queensland and northern New South Wales have also pushed up vegetable prices, with food prices rising 5.9 percent annually.
Australia is far from the only nation struggling to contain inflation, which is being exacerbated by global supply chain constraints and Covid isolation restrictions.
But the most recent CPI is still well below that of other advanced economies.
New Zealand’s annual inflation rate of 7.3 percent in the June quarter was the highest since the June quarter of 1990.
The United States had an inflation rate of 9.1 percent in June, the lowest since November 1981.
Canada’s inflation rate of 8.1 percent in June was the highest since January 1983.
Nonetheless, Australia’s underlying inflation measures, which exclude volatile prices such as petrol, were still well above the RBA’s 2-3% target.
The trimmed mean was 4.9 percent, the highest since the June quarter of 1991.
Recurrent flooding in south-east Queensland and northern New South Wales has also pushed up vegetable prices (pictured is Paddy’s Markets in Flemington, west Sydney).
What a 75 basis point rate hike in August would mean
$500,000: Increase of $231 from $2,215 to $2,428
$600,000: Increase of $256 from $2,658 to $2,914
$700,000: Increase of $298 from $3,101 to $3,399
$800,000: Increase of $341 from $3,544 to $3,885
$900,000: Increase of $383 from $3,987 to $4,370
$1,000,000: Increase of $426 from $4,430 to $4,856
Increases come on the back of Deutsche Bank forecast that the Reserve Bank of Australia will raise interest rates by 0.75 percentage points from 1.35 per cent to 2.1 per cent in August, with a Commonwealth Bank floating rate rising from 3.39 per cent to 4 .14 percent is raised