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Tuesday 25 January 2022

Inflation back in the target band

Inflation stirs a bit

Muchos excitement on the social media as annual underlying inflation increased to 2.63 per cent for the trimmed mean measure (and 2.68 per cent for the weighted median). 

So inflation is, for now, well and truly back in the target band, after a long hiatus. 

Headline inflation came in at 3½ per cent.

On a cumulative basis inflation has been very low over the past 5 or 6 years, leading many commentators to call for a lowering of the target to 2 per cent (though not so much today, I note!).

Tradables inflation was high at 4.9 per cent in 2021; while non-tradables inflation was considerably lower at 2.8 per cent. 

The ABS measure for rental prices picks up the capital cities, and possibly lags a little, coming in at only 0.4 per cent in 2021, far lower than in previous cycles. 

The wrap

Overall, this was a strong reading, with inflation driven by fuel, food, and in particular new dwelling costs (up by another 4.2 per cent in Q4, after a 3.3 per cent increase in Q3).

The Reserve Bank may not be in a rush to hike though, given that annual wages growth is 2.2 per cent, and expectations for pay rises are still anchored at low levels. 

Fiscal support will also be wound back over the next year or two, and it's not yet clear how the economy will track when the massive fiscal support is withdrawn. 

In any case much of the inflation relates to supply chain issues in 2021, which will be mostly resolved later in 2022 - certainly for food and new dwelling costs - so hiking interest rates while real wages are negative possibly wouldn't serve much useful purpose. 

Still, stock markets didn't like it much, the XJO being down over -3 per cent at 6,923 (public holiday tomorrow, so there will be no rising from the dead today).