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High-flying annual inflation rate in Australia in 2021

posted onJanuary 26, 2022

The annual inflation rate in Australia accelerated to 3.5% in the fourth quarter of 2021 from a 3.0% in the third quarter, the Australian Bureau of Statistics (ABS) said on Tuesday (Jan. 26). 

That exceeded expectations for an increase of 3.2% boosted by rising fuel prices, global supply chain issues, material shortages, and increased demand ahead of the Christmas holiday. 

It is also above the Reserve Bank of Australia’s (RBA) medium-term target range of 2-3% inflation. 

According to the ABS, main upward pressure came from transport (12.5% vs 10.4% in Q3), food and non-alcoholic beverages (1.9% vs 1.3%), alcohol & tobacco (1.1% vs 4.4%), housing (4% vs 1.6%), furnishings (3.6% vs 6.0%), recreation (2.1% vs 2.3%), health (3.3% vs 4.9%), and insurance & financial services (2.2% vs 1.1%). Meanwhile, the cost of communication fell less (-0.5% vs -1.0%). 

On a quarterly basis, consumer prices went up 1.3%, the most in 5 quarters, above market estimates of 1% and up from 0.8%  in the third quarter, due to significant price rises for new dwelling purchase by owner-occupiers (+4.2 percent) and automotive fuel (+6.6 percent). 

"Shortages of building supplies and labour, combined with continued strong demand for new dwellings, contributed to price increases for newly built houses, townhouses and apartments," noted the ABS head of price statistics Michelle Marquardt. 

The RBA's Trimmed Mean Consumer Price Index (CPI) -which excludes those items with the largest and smallest price increases before taking an average of the remainder- went up 2.6% yoy, the most in 7-1/2 years. Quarter-on-quarter, the index increased 1%, the largest increase since 2008. 

At its last meeting of 2021, the RBA's board reiterated it “will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range”.

"This will require the labor market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time and the board is prepared to be patient." 

In a speech on December 16, the bank’s governor Philip Lowe  said a rate rise probably wouldn’t happen in 2022. 

The RBA Board meets on Feb.1.  It had said that it will continue to buy government bonds at a pace of A$4 billion a week until February, when it will review the operation. By mid-February, the RBA will hold a total of $350 billion of the bonds. Analysts generally assume it will end its asset purchase scheme and keep rates at 0.1%.

Tuesday’s data emboldened markets, which have long wagered the RBA was behind the curve on inflation and would have to start raising interest rates soon.

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