After the inflation shocker a few days ago, the outlook for a deeper Australian recession is taking shape.
It will be driven by two extra interest rate hikes in the next two months, ensuring that house prices continue to fall fast and households experience a material asset price shock with consumption to follow.
It was not that the inflation print was worse than the RBA expected. It was actually slightly better at the headline rate:
What will spook the bank is how broad-based the price rises. The Trimmed Mean was 6.9% versus the 6.5% expected and December monthly inflation erased nearly any sense of a peak. Alex Joiner:
25bps in the next two meetings is all but guaranteed. There is a strong case for the RBA to revert to 50bps hikes in these numbers.
Will they? I doubt it. Why? The fixed-rate mortgage reset means so much pain is yet to arrive:
What this conundrum presents is a higher volatility cycle. The RBA has to keep hiking on the inflation overshoot even though the economy is clearly slowing fast and embedded mortgage tightening is going to smash into households over the next six months.
This clearly raises the prospect of a rates overshoot and a sudden stop for the economy later this year.
Australian recession is taking center stage.
