Australia’s Inflation Exceeds Estimates as Recovery Builds

Australia’s consumer prices rose faster than forecast in the final three months of last year as the government amended funding to various stimulus programs amid an economy regaining momentum.

The consumer price index advanced 0.9% from the third quarter, underpinned by increases in tobacco excise, compared with economists’ estimates of a 0.7% gain, data from the Australian Bureau of Statistics showed Wednesday. Annual CPI also beat forecasts, similarly rising by 0.9% versus an estimated 0.7%.

“Since the June quarter fall of 0.3%, the increase in annual inflation largely reflects the unwinding of free child care and higher petrol prices,” said Michelle Marquardt, head of Prices Statistics at the ABS. “The rise in demand for new dwellings is reflected in higher building approvals for houses and a record value for housing loan commitments.”

Australian prices have been hit by cross-currents caused by fallout from Covid-19 and governments ending some support programs in favor of stimulus for areas like housing. The Reserve Bank of Australia has adjusted its inflation framework to allow the economy to run a little hotter. It doesn’t intend to tighten borrowing costs until inflation is sustainably within the 2-3% target.

Achieving that will require strong wage growth stemming from a tighter labor market, outcomes unlikely to be in the offing any time soon with the jobless rate at 6.6%.

Today’s report showed the quarterly trimmed-mean gauge of inflation matched estimates, rising 0.4%, and slightly exceeded them on an annual basis, advancing 1.2% versus a forecast 1.1%

The weighted-median gauge, another core measure, advanced 0.5% from the third quarter for an annual increase of 1.4%, compared with forecast increases of 0.4% and 1.2%, respectively.

What Bloomberg Economics Says…

“There is little sign of emerging inflation pressure, with such tension only witnessed in higher purchase costs for new dwellings and motor vehicles, and a stabilization in rents..”

— James McIntyre, economist

For the full note, click here

Separate data released at the same time as inflation, showed business conditions — measuring hiring, sales and profits — surged in December to the highest level since 2018. The employment index surged, reflecting Australia’s strengthening labor market that has seen unemployment fall to 6.6% in December from a high of 7.5% in July. The economy entered the pandemic with a jobless rate of 5.1% in February 2020.

“The rise in the employment index is very encouraging,” said Alan Oster, chief economist at National Australia Bank (OTC:NABZY) Ltd. that runs the monthly business sentiment survey. “The gains have been seen across all states and notably, Victoria appears to have caught up with New South Wales and Queensland — great news for the state that has suffered an extended lockdown.”

Yet, business confidence slid in the period amid a flareup in Covid outbreaks in Sydney and elsewhere.

More Detail

Today’s inflation report showed tradables prices, which are typically impacted by the currency and global factors, fell 0.4% in the fourth quarter from the previous three months. Non-tradables, which are largely affected by domestic variables like utilities and rents, advanced 1.5% due to the scheduled hike in the tobacco excise.

Other details in the report include:

There was a rise of 6.3% in domestic holiday travel and accommodation following the re-opening of state and territory borders and the peak summer holiday period. International holiday travel and accommodation was again imputed
The most significant price fall was in electricity, down 7.5% after Western Australia provided a one-time credit to households
The Reserve Bank of Australia meets for the first time this year on Tuesday and is expected to keep its cash rate and yield target to 0.10%. It is also set to maintain its A$100 billion ($77.4 billion) quantitative easing program.