Today was an important day for anxious inflation and interest rate watchers. Expectations were high that the inflation rate would peak at 8% and start its descent, taking the heat out of the economy and the pressure off the RBA to keep plugging away at rate rises.
Hopes were dashed of avoiding a rate rise though, as CPI came in higher than expected at 7.8% over the year to December – still not quite the 8% expected peak but stronger than most economists had expected following 7.3% growth in the September quarter.
Domestic and international travel, new homes and, least surprisingly, electricity, were the biggest areas of expenditure in the economy.
The core inflation figure wasn’t reassuring either – it grew from 6.1% in the prior quarter to 6.9% in December – a number that will no doubt be closely studied by the RBA.
Inflation has now reached its highest level since June 1990, significantly increasing the likelihood of a rate rise when the bank meets early next month.
There is now a 75% chance of a rate rise – and another 25bp increase would take the cash rate to 3.35%.
Cooling sentiment
“Today’s figures will not come as welcome news for investors, who have enjoyed a New Year rally based on cooling sentiment around inflation and China’s reopening,” Stake ASX equities analyst Dylan Zhang said.
“Today’s higher-than-expected headline inflation figure at 7.8%, the highest in 35 years, confirms that inflationary pressures have not peaked as expected, so we can expect rate hikes to continue or even increase.
“It’s likely we’ll see a 25bps hike at the next RBA meeting but a 50bps hike is not unthinkable. With the RBA’s cash rate at 3.1% and inflation running at 7.8%, the real interest rate remains at -4.7%. If we look back to May 2022 at the start of the rate hike cycle, the real interest rate was -5.15%, not much lower than now.
“This inflation-adjusted figure reflects the true cost of borrowing and saving, showing that most people are still losing purchasing power over time.
“Despite markets being buoyed by news of a small slowdown in the jobs market last week, the quarterly wage price numbers also showed the fastest increase in nearly a decade. Given this, signs currently point to a terminal rate of 4.35% by the end of 2023.
“Turning to the markets, most sectors are likely to stay negative, but it’s likely that recent gains for tech stocks will backtrack the most.
"With a bear market looking more sustained, volatility is almost guaranteed. However, commodity and energy sectors may benefit from China’s economy restarting.
"Companies like BHP (ASX:BHP) and Rio Tinto (ASX:RIO) could also benefit from the recent appreciation in the Aussie dollar as their exports become more valuable.”
Treasurer Jim Chalmers said: “Inflation was the defining challenge in our economy in 2022 and it will be in 2023 as well. Our expectation now is that inflation has peaked, but it will still be higher than we’d like and for longer than we’d like.”
The treasurer went on to say that he hoped to see inflation start to moderate over the coming quarters.
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