Australia inflation accelerates to 32-year high of 7.3%; yields gain

Australia’s annual headline inflation accelerated to a 32-year high in the third quarter, validating the Reserve Bank’s rapid policy tightening and sending government bond yields higher.

The consumer price index advanced 7.3 percent in the three months through September from a year earlier, compared with a median estimate of 7 percent, Australian Bureau of Statistics data showed Wednesday. That was the highest reading since the third quarter of 1990 when the RBA hiked so aggressively it tipped the economy into recession.

Three-year government bonds sold off, sending yields about 10 basis points higher and longer dated notes responded similarly, rising above 4 percent before retracing some of those gains.

The most significant contributors on a quarterly basis were new dwellings, up 3.7 percent, gas 10.9 percent and furniture, 6.6 percent higher, the ABS said.

“Labor shortages in the house construction industry, leading to rises in labor costs, contributed to the rise in new dwellings,” Michelle Marquardt, head of Prices Statistics at the ABS, said in a statement. “The continuation of material shortages added further price pressure.”

The RBA expects inflation will peak at just under 8 percent in the current quarter, suggesting today’s strong figures may not be a surprise. The result supports the central bank’s rapid tightening cycle that has lifted the cash rate to 2.6 percent this month from 0.1 percent in May in an effort to get control of inflation.

It has signaled further hikes are likely and financial markets and economists are currently predicting two more quarter-point moves this year to 3.1 percent.

“This is a very strong inflation print,” said Sean Langcake, head of macroeconomic forecasting for BIS Oxford Economics.

“Nevertheless, it is broadly in line with the RBA’s expectations,” he said. “Inflation remains uncomfortably high for the RBA, but they have already tightened conditions materially which will temper demand-driven inflation in 2023.”

Core inflation, a measure preferred by the RBA, accelerated to 6.1 percent last quarter from a year earlier, exceeding economists’ forecast of 5.5 percent. That reading of the trimmed-mean measure was the strongest since the series began in 2003.

Australia is far from alone in struggling with escalating consumer prices, but is fortunate that wage growth has so far remained contained. That allowed it to break ranks with global counterparts this month and downshift to a quarter percentage-point hike as policy makers elsewhere stick with outsized moves.

The Federal Reserve is expected to raise rates by 75 basis points again next month as it looks to cool inflation pressure. Central banks from the UK to New Zealand are also tightening sharply to rein in prices fueled by pandemic-era stimulus and later supply-chain disruptions.

Coles Group Ltd., Australia’s second-largest supermarket, predicts inflation will accelerate further as some of the nation’s prime east coast farmland is inundated by flooding.

“We do expect cost price inflation to increase given suppliers are still seeking further increase to cover their costs and obviously there’ll be some further disruption from the flooding,” Steven Cain, chief executive officer at Coles, said in an earnings call Wednesday.

He also highlighted mounting labor costs, saying “wage increases this year have been higher than they’ve been for quite some time.”