CPI jump exceeds expectations

  • By Zilla Efrat

The Consumer Price Index (CPI) jumped 2.1 per cent in the March 2022 quarter and 5.1 per cent annually, prompting some economists to forecast a rate hike as early as next month.

The jump appears to have exceeded economists’ expectations and was well above the Reserve Bank of Australia’s most recent February forecasts.

“The catalysts were in the expected places, but the magnitudes (particularly in housing) were more extreme than anticipated,” Ben Jarman, chief economist at J.P. Morgan.

“The RBA had seemingly committed to seeing a little more data, particularly on wages, before acting, but the data is enough in our view to bring forward the first hike from June to the next meeting in May (+15 basis point on the target).”

NAB economists also expect the RBA to raise the cash rate target by 15 basis points at next week’s May board meeting. Further 25 basis point increases in June, July, August and November will take the cash rate target to 1.25 per cent by year’s end, they say.

But while the RBA could increase rates next week, CBA economists still believe the board is more likely to wait for confirmation that wages have started to lift towards the goal rate of 3 per cent.

Craig James, chief economist at CommSec, says the other complication is the timing of the federal election on May 21.

He says: “The Wage Price Index is released on May 18. Also, the National Accounts are released on June 1, containing the latest economic growth figures and other wage measures. So, we expect the RBA to be positioned to lift rates at the board meeting on June 7.”

Michelle Marquardt, head of prices statistics at the Australian Bureau of Statistics (ABS), says the CPI recorded its largest quarterly and annual rises since the introduction of the goods and services tax (GST).

The most significant contributors to the rise in the March quarter CPI were new dwellings (+5.7 per cent), automotive fuel (+11.0 per cent) and tertiary education (+6.3 per cent).

"Continued shortages of building supplies and labour, heightened freight costs and ongoing strong demand contributed to price rises for newly built dwellings,” says Marquardt.

“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," says adds.

"The CPI's automotive fuel series reached a record level for the third consecutive quarter, with fuel price rises seen across all three months of the March quarter."

Marquardt says the rise in tertiary education reflects the continuing impact of updated student contribution bands and fees, introduced last year.

Notable rises were also recorded across the food group (+2.8 per cent), reflecting high transport, fertiliser, packaging and ingredient costs, as well as COVID-related disruptions and herd restocking due to favourable weather.

Main contributors to the rise in food prices included vegetables (+6.6 per cent), waters, soft drinks and juices (+5.6 per cent), fruit (+4.9 per cent) and beef (+7.6 per cent).

"The rise for the food group was softened by voucher programs in Sydney and Melbourne, which reduced out of pocket costs for meals out and takeaway foods," says Marquardt.

“The grocery component of the group, which excludes meals out and takeaway foods, rose 4.0 per cent in the March quarter.”

Prices for other grocery items, such as non-durable household products (+6.7 per cent), which includes products such as toilet paper and paper towels, also rose in the March quarter.