David Bassanese
3 minutes reading time
Today’s quarterly consumer price index report (CPI) suggested the hot underlying inflationary pressures evident in the September quarter persisted into the December quarter. Consistent with the recent tightening in the labour market, this suggests the lift in economic growth over the past year has already run into inflationary roadblocks.
As a result, the Reserve Bank seemingly has little choice but to throttle back current economic momentum through at least one, or possibly two, rate hikes in the first half of this year.
The key number in today’s report was the seasonally adjusted quarterly gain in trimmed mean inflation. After a gain of 1.0% in the September quarter, trimmed mean quarterly inflation only eased to 0.9% in the December quarter, suggesting continued above-target inflation pressures. Looking into the details, most of the sources of demand-driven strength that the RBA identified last quarter continued into the December quarter.
- New home purchase costs rose 1.3% over the quarter, up from 1.0% in the September quarter. The ABS noted that “project home builders in some cities have raised base prices in response to increased demand and to pass through higher labour and material costs”.
- Rental inflation also remained firm, with a quarterly gain of 0.8% after a 1.0% gain in the previous quarter.
- Holiday and travel costs rose a blistering 4.9%, after a 3.0% gain in the previous quarter. Again, the ABS noted “strong demand in the lead-up to Christmas, the summer school holidays and major events such as the Ashes cricket test series.”
- To the extent that spending by the Barmy Army has added to hospitality pricing pressures in the quarter, this could (to some extent at least) be considered a ‘one-off’, though not something the RBA could easily look through given broader pricing pressures across the economy.
- One bright spot in the report, at least, was an easing in consumer durable prices, with household textile prices down 1.5% following quarterly gains of 4.7% and 3.5% in the previous two quarters.
All up, it appears to be game, set and match for a rate rise at the February policy meeting. My base case is that the RBA will raise rates by 0.25%, taking the cash rate to 3.85%. What’s more, if the March quarter 2026 CPI report is also firm (with trimmed mean quarterly inflation of 0.8% or more), the RBA might also raise rates again at the May policy meeting.
To my mind, two rate hikes – given our highly indebted and interest-rate-sensitive economy – should be more than enough to dampen economic growth again and rein in ongoing inflation pressures in areas such as housing, travel and hospitality.