Inflation soars to 4 per cent in August boosting chance of November 3 Reserve Bank rate hike

Inflation has soared to a three-month high of 4 per cent — increasing the chance of a November rate hike but calling into question Labor’s claim the Middle East conflict is the key driver of higher consumer prices.

The consumer price index in August climbed sharply from July’s 3.5 per cent level, putting it above the Reserve Bank’s 2-3 per cent target for the 13th straight month and sparking fears of even more pain on Melbourne Cup day.

Automotive fuel prices surged by 13.5 per cent over the year but during August alone, prices increased by 14.8 per cent leading to overall transport costs rising by 5.6 per cent on an annual basis.

This occurred after the Federal Government withdrew its 16-cent a litre fuel tax relief, pushing average unleaded petrol prices back above $2 a litre as motorists typically paid more than $2.50 a litre for diesel.

Treasurer Jim Chalmers blamed the oil crisis for Australia’s inflation problem, despite a re-escalation of tensions in the Middle East occurring after the August inflation data when crude oil prices were still under $US100 a barrel.

“These numbers confirm the overwhelming influence on inflation in August was higher global oil prices,” he said.

“All of the increase in annual headline inflation was from a combination of higher fuel costs and the unwinding of last year’s energy rebates.”

But the Reserve Bank’s preferred measure of inflation, the trimmed mean, remained unchanged for the third straight month at 3.6 per cent, despite the big fluctuation in crude oil prices linked to Iran’s attacks in the Gulf.

University of New South Wales economics professor Richard Holden said the constant pace of underlying inflation since June discredited Dr Chalmers’ claim the Middle East conflict was solely to blame for the inflation problem, during a domestic productivity crisis.

“That wasn’t affected by changes in fuel prices. It could be that, going forward, those fuel prices will flow into other goods that are in trimmed mean but there’s no real evidence of that yet,” he told The Nightly.

“This just hasn’t had a meaningful effect on the measure of inflation that the RBA use in making their decision.”

This underlying of inflation without volatile price items was also above the RBA’s target for the 13th consecutive month, with Professor Holden noting domestic supply constraints were the driver of price pressures.

“That’s got nothing to do with what’s going on in the Middle East,” he said.

The Australian Chamber of Commerce and Industry’s chief executive Andrew McKellar said domestic factors and not just higher oil prices were to blame for high inflation, echoing Reserve Bank governor Michele Bullock’s point about “domestic capacity pressures” convincing her monetary policy board on Tuesday to vote unanimously to hike rates for the fourth time this year.

“While external pressures such as international fuel prices are a factor, Australia has a home-grown inflation problem which has been spilling into higher interest rates,” he said.

“The Government has the ability to address this home-grown inflation problem by reducing government spending and addressing the regulatory and red tape burdens that are driving up costs.

“The Government needs to act with a sense of urgency in these areas.”

Shadow treasurer Tim Wilson said high government spending was making Reserve Bank rate cuts a remote prospect.

“That means that the Reserve Bank will have no temptation to ease the pressure on interest rates,” he told reporters in Melbourne.

“Meanwhile, the government continues to spend with gay abandon without any sense of understanding of the consequences that if they keep stoking inflation, Australian households are going backwards.”

Goods inflation rose by 4.2 per cent over the year, as a result of elevated crude oil prices, while services inflation went up by 3.7 per cent.

The Australian Bureau of Statistics delivered the bad news a day after the RBA on Tuesday increased interest rates for the fourth time this year to a 15-year high of 4.6 per cent and another increase on top of that on November 3 would take it to an 18-year high of 4.85 per cent.

“Essentially today’s data validates the RBA’s decision yesterday to raise rates as it shows inflation is still far from under control, leaving the RBA with no choice but to act,” KPMG chief economist Brendan Rynne said.

EY senior economist Paula Gadsby is also bracing for another rate hike by the end of the year.

“We expect the board may need to raise interest rates again before the end of the year if, as we expect, inflation momentum fails to moderate,” she said.

Despite the prospect of higher interest rates as a result of higher inflation, the Australian dollar paradoxically fell by 0.4 of a US cent to 69.60 US cents in the minutes after the inflation data was released.

Professor Holden said the short-term move in the currency was more a product of headline inflation coming in below the market expectation of 4.1 per cent.

“The market, in a very short-run reaction, interpreted that as being, ‘Oh, okay, the probability of future rate rises has gone down a tiny bit’ - I don’t think one wants to read too much into that,” he said.