Oh man. Looks like inflation is back on!
After a downward trend in the October number had planted widespread hope, the November number has risen again. Inflation is at 7.3% according to the Australian Bureau of Statistics (ABS) monthly indicator. This corresponds to its record high, as the next chart shows.
What rises the most? It’s still the same damn thing: new home purchases by owner-occupiers. This excludes the price of land and mainly measures construction costs. It is being pushed up by higher labor and lumber prices and so on. The cost of building a new house or renovating it is currently very high: 17.9% more than last year.
Auto fuels also rebounded sharply this month, up 16.6% for the year to November. November was a time of rising gasoline prices as the local market reacted to higher prices in global oil markets and the end of fuel consumption tax cuts continued to come into effect (it officially ended on September 30, but the price increases came over time).
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As the next chart shows, gasoline prices were very high in early November before falling in the second half of the month.
However, there is good news for petrol. In November, global oil markets were buoyed by fears that there would not be enough fuel for the Northern Hemisphere winter. But it has been mild in Europe and oil prices have fallen. The high price for a barrel of crude oil in November was higher than today’s price. Therefore, not all of November’s inflationary pressures will be sustained. This is good news: we can expect inflationary pressures from this category to ease.
Fruits and vegetables are another category that was high in November and has since declined. My own grocery receipts show that a head of broccoli was $2.15 last November, and Woolworths is now advertising one for $1.62. Zucchini too: Drop to $1.18 from $1.58. Prices were pushed up by floods in November, but shortages are being overcome.
For this reason, the Reserve Bank (RBA) likes to remove some of the most volatile series when strategizing how to react to inflation numbers.
Still, the high result means the RBA is likely to pull the trigger for another rate hike in February. The market is pricing in around a 50 percent chance and commentators are including it as job vacancy data shows a persistently high rate of around 0.95 vacancies per unemployed person.
“[This data is] strong enough to reduce the risk of a February pause for the RBA and reinforce our view that the top interest rate will be at least 3.85%,” ANZ economists wrote in a note to clients yesterday.
What is interesting, however, is that while markets anticipate immediate rate hikes, expectations of later rate cuts have also become entrenched. Interest rate futures markets have priced in a slower rise and fall ahead of this latest data. Now they expect rates to rise sharply, peaking in September and the first chance of a rate cut in December this year.
Of course, the full impact of all rate hikes in 2022 is yet to be felt. They will continue to seep into the economy even as the RBA piles up more cuts. Finding the right balance will be very difficult. Can they depress prices without destroying the economy? By the end of 2023 we will know a lot more.
This article was first published by Crikey.
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