A surprise jump in both headline and underlying inflation has economists convinced the Reserve Bank of Australia will be forced to lift interest rates well ahead of its official outlook and as early as May.
Headline inflation was 3.5 per cent in the year to December 31, while underlying inflation – the RBA’s preferred measure – was 2.6 per cent, solidly within the central bank’s 2 per cent to 3 per cent target band.
The result, along with fears over a possible invasion of Ukraine, sent Australian shares tumbling on Tuesday in the second-biggest sell-off this year. The S&P/ASX200 Index dived 2.5 per cent, or 177.9 points, to 6961.6 on Tuesday; the broader All Ordinaries dropped 2.6 per cent to 7248.1.
Investors had tipped 3.2 per cent headline inflation (CPI) and 2.3 per cent for underlying inflation. The RBA’s most recent forecasts suggested the underlying figure would remain below 2.5 per cent until the end of 2023.
“The large beat on underlying inflation in Australia’s quarter four CPI materially undermines the RBA’s ‘wages first’ narrative,” said Deutsche Bank economist Phil Odonaghoe, adding that he expected the first interest rate increase in more than a decade to come in August, although May was also possible.
Commonwealth Bank chief economist Gareth Aird, who had the most accurate prediction among market economists for Tuesday’s outcome, is also tipping monetary policy to begin normalising from August.
The RBA has always been clear it wants to see wages growth north of 3 per cent before beginning to normalise monetary policy and lifting the cash rate from the record-low 0.1 per cent, and Mr Aird said internal CBA data from the December quarter showed wages were really starting to pick up.
“Our expectation for the labour market to continue to tighten, for wages growth to accelerate and for underlying inflation to push towards the top of the RBA’s target band from here means the risk lies with an earlier hike than August 2022,” Mr Aird said, suggesting June was a possibility.
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