Inflation generation: Prices might be rising like the ’90s but we’ve never ever seen a trimmed index this mean

Australian inflation, or what econo-geeks like to confuse and obfuscate as the ‘consumer price index’ (CPI), came in to town on Wednesday ready to mess with the law – and it did.

Annual consumer price index (CPI) inflation arrived at its highest mark in more than three decades, largely driven by the high cost of goods.

In fact, according to the Australia Bureau of Crunched Numbers, goods are behind almost 80% of the rise in the CPI over the last 12 months, reflecting high freight costs, busted up supply lines and long, tight and elevated demand.

A higher than expected headline CPI was up by 1.8% in the September quarter (market expectations were for a 1.6% rise) taking annual growth to 7.3%, the most crackingest pace of inflation since 1990.

The scary part really in these inflation numbers are the underlying measures – and by gad, these are the RBA’s preferred measure – ‘the trimmed mean’, and it’s a mean one in September, up by 1.8% over the quarter.

Diana Mousina at AMP says that’s the highest quarterly increase on record.

“Well above consensus and our estimates of 1.5%. Annual growth in trimmed mean inflation rose to 6.1% – the highest on record.”

So clearly, Diana Mousina says, inflation is high across the board.

Bad goods

But there’s a standout too.

“Goods prices inflation remains the main driver of higher prices, with goods inflation up by 9.6% over the year while services prices is 5.1% higher.”

According to the ABS, goods accounted for circa 75% of the annual rise in CPI prices over the past year.

“Goods inflation is clearly turning down in the US (see below) which should also be the case in Australia in 2023 (Australia lagged the global lift in inflation and is now lagging the downturn in goods prices),” Mousina says.

Here’s what’s costing mostest:

• Elevated food prices (related to high commodity prices over 2022 which lifted the cost of food production and the continual flooding on the east coast of Australia) with total food prices up 3.2% in the quarter. The largest price rises across fruit and vegetables (+4.5% over the quarter), dairy (6.8% over the quarter) and meals out/takeaway (+2.9% – which also rose because of the end of the NSW Dine and Discover program although this was partly offset by Victoria’s Dining and Entertainment Program).

Food prices could remain elevated over coming months because of further flooding in eastern NSW, even though commodity prices are down from their early 2022 highs, Mousina warns.

• Housing-related costs (up by 3.2% over the quarter).
• High household furnishing costs which are still being impacted by supply chain issues (although this is easing) with household furnishings prices up by 2.8% over the quarter, furniture prices rose by 6.6% and household services were 1.9% as businesses passed on higher wage and operational costs. Slowing consumer demand in 2023 should see an easing in furnishing prices.

Not so bad, but still bad historically:

• Alcohol and tobacco, with prices up by 1.2% over the quarter with the biannual alcohol tax and the tobacco excise.
• Health prices were 0.3% higher over the quarter with declines in medical products (-1.5%) and pharmaceutical products (-1.9%) but rises in medical and hospital services (+0.6%)
• Communication prices rose by 1.4% over the quarter, with telecommunication prices up 1.3% as prices for mobile phones and plans rose.
• Recreation was 1.3% higher over the quarter due to a 3.6% rise in domestic holiday travel and a 16.8% rise in international holidays.
• Education prices were flat over the quarter, with prices usually rising in the March quarter.
• Insurance prices rose by 1.3%

Actually getting better:

• Clothing and footwear, with prices down by 0.2% in the September quarter and the expected weakness in consumer discretionary spending in 2023 as consumers deal with rate rises and inflation should limit price rises in consumer clothing and footwear in coming periods.
• Transport, with prices down by 0.4% over the quarter mainly because of a fall in petrol prices (-4.3%) as oil prices came down. Oil prices have been around $85/barrel over recent months so petrol prices should remain around current levels. Offsetting the fall in petrol prices was a lift in prices for spare parts for motor vehicles (+3.1%) and a 6.6% rise in urban transport fees.

However, the issue is that what may have started out as high goods inflation has seeped into services prices.

Services inflation at 5.1% over the year is far too high, especially as wages growth is expected to rise from here (expect wages to be around 3.5% year on year in mid-2023, from 2.6% at the moment).

A lot of goods have come out of all this:

According to the ABS, goods accounted for 75% of the annual rise in prices over the past year.

The good news is that goods inflation should come down in 2023, as AMP has been highlighting in its inflation indicator  which takes into account supply chain pressures and commodity prices.

What Diana (and AMP Capital) did next:

“So this means that there remains pressure for the RBA to lift interest rates further to get inflation down, especially if services inflation remains sticky in 2023 and (yesterday’s) data means that the RBA will need to revise up its trimmed mean forecasts for 2023,” Mousina says.

“We had been expecting a 0.25% hike at next week’s meeting, following on from the 0.25% done in October, which would take the cash rate to 2.8% and we stick to that view.

“While the inflation data surprised to the upside today, the RBA has already aggressively lifted interest rates since May and the inflation data lags impacts from rate changes and arguably rate hikes will do little to get food and energy inflation down, so we don’t see a need for the RBA to move to 0.50% hikes again.

“But we are adding another 0.25% rate hike into our RBA interest rate profile in December, taking the cash rate to a peak of 3.1% by the end of this year.”

Ouch. Are we done?

“No. The risk remains with more rate rises in 2023,” Diana added, a little ominously I thought.