New dwelling price inflation boosts CPI concerns

The main measure of inflation in Australia – the Consumer Price Index (CPI) – rose by 1.3 per cent in the December quarter. It was higher than the industry wide economists' consensus of 1 per cent. The annual rate of the CPI rose from 3.0 per cent to 3.5 per cent. The most significant price rises were for new dwelling purchase by owner-occupiers up, 4.2 per cent. The new dwelling purchase component of the CPI captures the cost of adding to the housing stock – newly built dwellings and major renovations. It is measured as the price of a new dwelling, excluding the value of the land. The CPI rise is against the backdrop during 2021 of construction being hit by a shortage of materials with global supply chain disruptions, combined with rising freight costs, along with rising labour costs at a time of high levels of building spurred by government incentives. "Shortages of building supplies and labour, combined with continued strong demand for new dwellings, contributed to price increases for newly built houses, townhouses and apartments," says the ABS's head of prices statistics Michelle Marquardt. Automotive fuel was up 6.6 per cent, along with furnishings/household equipment (up 3.6%) and health (up 3.3%). The capital city weighted increase in rents was 0.1 per cent up for the quarter and 0.4 per cent for the year. Rents fell again in Sydney and Melbourne, the fourth consecutive quarterly fall for Sydney, and the third consecutive quarterly fall for Melbourne. The REIA noted rents across the other capital cities, in line with population trends, continued to rise. The ‘underlying’ CPI or trimmed mean rose by 1 per cent in the quarter (consensus: +0.7 per cent) with the annual growth rate lifting from 2.1 per cent to a 7½-year high of 2.6 per cent. It sits in the middle of the Reserve Bank’s 2-3 per cent target range, Craig James the Commsec cheif economist noted. "Before the release of today’s December quarter figures, the Reserve Bank had expected annual underlying inflation to be now sitting at 2.25 per cent. "The RBA also “forecast (underlying inflation) to be around 2¼ per cent for much of the forecast period, increasing to around 2½ per cent by the end of 2023.” "The latest data showed underlying inflation at 2.6 per cent in the December quarter – above RBA forecasts. "Inflation has exceeded Reserve Bank expectations for the past two quarters. "And that means there will be greater discussion about when the Reserve Bank may start lifting interest rates. "So far, the Reserve Bank has largely ruled out rate hikes until 2024 – or 2023 at the earliest," he noted. "We will hear a lot more from the Reserve Bank next week. "The February Board meeting is held on Tuesday; the Reserve Bank Governor delivers a speech on Wednesday; and the Statement on Monetary Policy is issued on Friday." James added the Reserve Bank won’t just look at inflation rates when deciding when to lift rates. "It will want to see the economy at or near ‘full employment’ (a jobless rate near 4 per cent or below)." The jobless rate currently stands at a 13-year low of 4.2 per cent. "The RBA will want to see wage growth near 3 per cent," he added. The current annual growth rate of wages is 2.2 per cent, but with the job market tightening, there are more anecdotal reports that wages are starting to lift. The Commonwealth Bank Group economists believe that the job, wage and price metrics will be in place in the December quarter of the year for the Reserve Bank to start the ‘normalisation’ process of lifting interest rates. James says the path to normalisation may begin next week with the possibility that the RBA will end its bond buying program.