Inflation data reveals grim reality for Australian households

Cash-strapped households face further heartache after the latest inflation figures revealed a grim reality for every Australian.

The Reserve Bank of Australia’s all important trimmed mean inflation rate for the three months until December came in higher than expected at 0.9 per cent – or 3.3 per cent for the year, up from 3.2 per cent.

The headline inflation rate, which includes volatile items, was 3.8 per cent for the 12 months until December, up from 3.4 per cent in the 12 months until November.

According to Zyft consumer finance expert Joel Gibson, Wednesday’s inflation figures, combined with the end of energy rebates and rising health insurance costs, are smashing households budgets.

“All of these increases combined would mean an average Australian household should stand to shell out an additional $2192 over the course of this year,” Mr Gibson said.

He points out the inflation pain is widespread, hitting power bills, rentals and mortgages.

“These aren’t things you can avoid. The key is to focus on savings that actually move the needle. It’s not about skipping your morning $5 coffee,” Mr Gibson said.

Meanwhile, Betashares chief economist David Bassanese forecasts the hotter-than-expected inflation figures mean interest rates need to rise in February.

“All up, it appears to be game, set, match for a rate rise at the February policy meeting,” he said.

“My base case is that the RBA will raise rates by 0.25 per cent, taking the cash rate to 3.85 per cent.”

Mr Bassanese warns mortgage holders that a rate hike in February may not be the last one.

“The RBA might also raise rates again at the May policy meeting. To my mind, two rate hikes – given our highly indebted and interest-rate-sensitive economy – should be more than enough to dampen economic growth again and rein in ongoing inflation pressures in areas such as housing, travel and hospitality,” he said.

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Markets immediately increased the odds of a rate hike in February from 60 per cent to 70 per cent.

Meanwhile, Australian Bureau of Statistics head of price statistics Michelle Marquardt said the largest contributor to inflation was housing, which jumped 5.5 per cent, while food and non-alcoholic beverages were up 3.4 per cent.

The RBA will be watching the data closely as it continues its battle to get Australia’s inflation rate between 2 and 3 per cent.

It meets next Monday and Tuesday, with governor Michele Bullock to announce the board’s rates decision at 2.30pm on Tuesday.

Economists had said if trimmed mean inflation rose by 0.8 per cent or less for the quarter, it would spare mortgage holders a rate hike in February.

VanEck head of investment and capital markets Russell Chesler labelled Wednesday’s inflation data as “uncomfortably high”.

“Inflation is not moving decisively in the right direction,” Mr Chesler said.

“With unemployment still low at 4.1 per cent, household spending resilient and property prices continuing to rise, it is no longer a question of if rates move higher, but when the RBA acts and how many hikes ultimately follow this year.”

Bank’s surprise call on rate rises

Following Wednesday’s inflation reading, ANZ became the latest of the major four banks to expect the RBA to announce an interest rate hike when it meets early next week but said it should be a one-off.

ANZ said the inflation figures and the recent stronger-than-expected jobs figures should mean an interest rate hike on Tuesday.

“We now expect the RBA to raise interest rates by 25 basis points on 3 February,” ANZ head of Australian economics Adam Boyton said.

“The return of inflation in components of the housing group (namely new dwelling purchases and rents) is also likely to raise concern at the RBA.”

But Mr Boyton said ANZ expected a February rate rise to do the job on inflation.

“In the wake of an interest-rate increase, we would anticipate material softening in leading indicators of activity – such as auction clearance rates, consumer sentiment and business conditions/confidence,” he said.

“Accordingly, we view this as a single ‘insurance’ tightening, not the start of a series of rate hikes.”

Australia's Cash Rate 2022

Commonwealth Bank and National Australia Bank previously predicted an interest rate hike in February.

Westpac has yet to announce its new rate forecast prediction.

Prior to Wednesday’s figures being released, Mr Bassanese said the quarterly inflation figure would either “make or break” the case for a rate hike next week.

“My base case remains that the quarterly gain in trimmed mean inflation will be 0.8 per cent, which should be enough to keep the RBA sidelined in February,” he said.