Skyrocketing inflation has RBA readying interest rate scorched-earth

The ABS has just released CPI data for the June quarter, with headline inflation lifting by 1.8% over the quarter and by 6.1% year-on-year:

Australian CPI

The rise in CPI was fairly broad-based over the June quarter:

CPI by component

Goods accounted for 79% of the rise in the CPI this quarter, reflecting high freight costs, supply constraints and strong demand:

Goods and services inflation

“Underlying” trimmed mean annual inflation, which excludes large price rises and falls, increased to 6.1% – the highest reading since records began in 2003:

Underlying inflation

Headline inflation (1.8% QoQ) and trimmed mean (1.5% QoQ) met analysts’ expectations.

According to the Head of Prices Statistics at the ABS, Michelle Marquardt:

“The quarterly increase of 1.8 per cent was the second highest since the introduction of the Goods and Services Tax (GST), following on from a 2.1 per cent increase last quarter”…

“Shortages of building supplies and labour, high freight costs and ongoing high levels of construction activity continued to contribute to price rises for newly built dwellings. Fewer grant payments made this quarter from the Federal Government’s HomeBuilder program and similar state-based housing construction programs also contributed to the rise”.

“The CPI’s automotive fuel series reached a record level for the fourth consecutive quarter. Fuel prices rose strongly over May and June, following a fall in April due to the fuel excise cut”…

“The annual rise in the CPI is the largest since the introduction of the goods and services tax (GST).”

“Annual price inflation for new dwellings was the strongest recorded since the series commenced in 1999″…

“Annual trimmed mean inflation was the highest since the series commenced in 2003 and annual goods inflation was the highest since 1987, as the impacts of supply disruptions, rising shipping costs and other global and domestic inflationary factors flowed through the economy”…

These results are all but certain to see the RBA hike rates by 0.5% in August; although I hope that it will wait for next month’s wage data before hiking again in September.

Unconventional Economist
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Comments

  1. C.M.BurnsMEMBER

    TILOL

    Was reading an interview with WA farmers yesterday. They gave some figures on the cost of their inputs:
    Fertilizer up 100%
    Fuel up 80%
    Labour up 50% and that’s assuming they can even hire people

    they are running at 50% labour workforce and so, are deliberately slashing their crop so that they don’t waste (stupidly expensive fuel and fertilizer) on crops that they wont have enough staff to harvest

    • Sky high commodity prices good rain and astronomical land prices, I think the farming sector has nothing to complain about.

      Maybe if they paid anything like decent wages they could plant the whole of their paddocks. That would run contrary to the model of the landed gentry exploiting the wage serfs however.

      • Fishing72MEMBER

        Builders, farmers and fisherman are perpetually crying poor.

        “Labour costs up 50%”…..from slave levels of remuneration to exploitation levels of remuneration for the workers.

        • Jumping jack flash

          Pretty sure they raised all the [minimum] wages at the same time as plonking a ton of stimulus money into the economy.
          Was completely expected that wages would rise. This was the intention.

          Transitory? No.
          Highly suspicious? Yes.

          The farmers should be ok. The demand spike from the stimulus coupled with the inflation from the stimulus should be flowing to them and raising their revenues. For example, milk went up 60c, maybe a full dollar. Surely the farmers get something from that.

  2. Quantitative FleecingMEMBER

    And we still have the fuel inflation to come in September when the excise is removed. That won’t show up until the December quarter. Plus the inflation from the war profiteering gas cartels per gas and electricity prices. Which means that inflation figures will still be rising into January (per public CPI release).

  3. Inflation will be above 8% by year end, RBA better start increasing the cash rate to FIX THINGS

  4. One trick ponyMEMBER

    Market reaction to this is dovish – 3 yr and 10yr bond yields diving (albeit from levels that I believe were too high)

  5. Got my revised gas and electricity plans earlier in this week – up about 30% from the existing plan! I called them to complain and they said my current plan still has 6 weeks to go and to call back at the end because they will probably have some better deals at that time.

    • Strange EconomicsMEMBER

      $ 1 k a year more heating,. $ 2 k more on petrol.costs.
      Thats 50K less that the banks will be lending, so -5% to bid at the million dollar auction.

  6. 2023HomelessMEMBER

    Biggest issue seems to be it’s become broad based. Rather than just linked to supply constraints. Health, child care and telecommunications were really the only areas without inflationary pressure.

    This will make it rather hard for the RBA to go slow.

    And with such high inflation in the housing sector and durable goods, it means a fall in house prices will actually help reduce inflation where it matters. So I can’t see the RBA stopping rate rises until house prices fall enough to reduce housing price pressures. Which will be well into 2023. Buy which time house prices will be down 20% nationally and closer to 30% in Sydney.

    Looks to me like the great housing correction is pretty much locked in. The real question is will whether banks will start to also limit supply of credit (minimum deposits, low property valuations, larger buffers, more scrutiny on expenditure, HILDA changes)? I suspect they will within months, which will drive an acceleration in house price falls. Causing a nasty feedback loop…

    • Jumping jack flash

      The banks’ worst-case scenario is triggering a 2008-esque LIBOR increase as the quality of their debt is revealed at the same time as all the asset “values” their piles of debt are attached to get marked down.

      Interbank lending will seize up, just like in 2008 (or shortly after, whenever it was). Banks will implode one by one.
      That event was the trigger for them to all change direction back during the 2008 event, and flood the world with more debt once again.

      Will they do it again? Can they do it again? I suppose we will see what happens and what path they choose when the time arrives.
      However why do we even need to trod this well-known path?
      For what purpose do the banks inflict this pain on everyone, only for them to realise the inevitable conclusion of their actions?

      Just continue with the original plan of global hyperinflation… we all know its inevitable, and it will be beautiful…

  7. Dumb government won’t hose the inferno & pull the trigger, temporarily cut GST or any other alternative policy (fuel was the LNP & that only last ditch effort to win election). When we have sauce cheap gas we don’t have to be affected as much as most other countries! And what about rents surely they will shoot up even more as the immigrates start arriving on their recently approved visas!
    #onetermAlbo

  8. SnappedUpSavvyMEMBER

    No Death Star nuking from orbit this time? fa rk me I got a mortgage ya know

    • Waiting for the Mortgage Rate Black Hole with a gravitational force so strong that not even MPLOL can escape it’s event horizon.

  9. Jumping jack flash

    The robots at the RBA only can do one thing: Inflation increases. Raise interest rates. Their book says to do it, so it is done.

    It will be interesting once this blip of demand increase from those trillions of stimulus dollars fades away and then all we’re left with is the inflation from the energy crisis.

    Grab it while you can?
    My inbox is inundated with fairly routine jobs paying stupidly high wages at the moment. I saw some fairly standard, drone-like IT jobs advertised at 160K. 160K for web development!? 160K for setting up I can only imagine is a sales portal for selling imported stuff that nobody is going to be buying soon? Or maybe it is selling financial products that will soon be worthless ala 2008?

    I mean, the money is certainly tempting, but most of those jobs or even these entire companies selling imported stuff for markup, and all these companies selling financial products for the banks and insurance companies will vanish into the debt foam as soon as all that stimulus gets reallocated or absorbed and all we’re left holding is the energy crisis, while interest rates keep on rising.

    • I’m not as certain as you that prices will react to demand moderating.
      I’m seeing a lot of suppliers testing new price points even in sectors where demand has not been insane.
      If prices are sticky then we can expect inflation to be just a sticky, which leaves wages and CB’s to play catchup.
      With our hollowed out economy nobody in Australia needs to drop prices to keep the factory loadings up. The necessity for any producer to maintain factory throughput has always been a significant part of steep price declines we typically associate with the onset of a recession. But what if this time it’s different?
      At the moment there’s no excess inventory in the system and unemployment is at record low levels. This is not how your typical recession kicks off.
      My bet is that price increases are locked and loaded and not about to mount a retreat
      Wage increases are showing up wherever there’s an imbalance (I think your 160K web developer just reflects this imbalance in Indian IT guys coming to Australia) . I’ve been trying to fill two critical positions for over 3 months and have only received three somewhat suitable resumes (lots of BS inflated skills resumes but F’all depth in the available skills talent pool, and I’m willing to pay a lot more than $160K for the right person)
      Nope this not simply going to unwind on its own, the RBA might have some wiggle room at the moment but if they’re paying attention to the global capital situation, and wanting to keep on the front foot, they’re going to go hard in August. To be honest they’ve got no choice.

      • One trick ponyMEMBER

        Prices may very well not retreat, but they just need to stop rising for CB’s to start believing that what they are doing is working. In saying that I agree another large hike in August is likely (but remain of the view that peak rate is well below market pricing).

      • Jumping jack flash

        “I’m not as certain as you that prices will react to demand moderating.”
        No, I don’t think I’ve said that.

        There’s two inflationary forces at play – the first is causing the spike in demand. The second is the energy crisis. Both are similar in some ways, but very different in others. Both raise prices. Only one [broadly] raises wages. The spike in demand from stimulus spending exacerbates the inflation caused from the energy crisis as well.

        What will happen is interest rates will keep on rising. The demand spike from the stimulus – which is causing inflation in prices AND wages, will slowly fade away through immigration and natural momentum, etc, and eventually all that will be left is the inflation from the energy crisis.

        Inflation = raising interest rates, so interest rates will just continue to go up and up unless the RBA looks at the causes for the inflation before raising interest rates. Or do they just see the inflation and raise interest rates? I don’t know. I don’t think we’ve been in this exact situation before. 2008’s situation was more like the stimulus-style scenario where there was too much debt created in the preceding 10 years that had nowhere to go except into demand and prices. Raising interest rates kind of made sense in that scenario. It makes no sense now because our problems are stimulus spending and an energy crisis.

      • “My bet is that price increases are locked and loaded and not about to mount a retreat”

        Prices are never static and will retreat once the supply chain constipation clears and natural demand collapses. Excess inventory will be common and if wages/employment get hammered in the recession “we had to have” then the price declines could be large.

        Your employment roles are unique and highly skilled (defence right?) and as such should not be a test of the average. Look at labouring, nurses, teachers, tradies, casual rates etc. There is a lot of bulk in those areas vs your industry which may employ a few thousand locally?

  10. Vic DynoMEMBER

    I’m thinking we will have to keep raising while the fed is. Otherwise our dollar will collapse and we be at risk of default on our foreign debt (Sri Lanka style). Have I got this right?

    • I think so, can’t see how we don’t increase inline with the fed, otherwise $AUD goes Kaput and we have more imported inflation costs. Or said another way, we will punch a hole in the side of the block. 🙂

    • Feds about to crash their market, if they pivot back to brrrr does that mean we should follow? My view is no, following the Fed with completely different factors at play is silly. Currency is only 1 part of of the 3 RBA mandates. The other 2 relate to employment and wealth of Australians.

  11. Arthur's Poodle

    Dumb question:

    Would a high inflation rate help deflate Australian housing debt as a portion of GDP?
    (Assuming some wage inflations kicks off too.)

    • Technically it could, but there are no assurances of wage lift for the community at large, it’s looking specific to industry, which can be easily targeted at the immigration summit in September. On the point of immigration, that will take us back to a solid base of inflation which could cause a positive feedback loop if it isn’t under control by then.