The Australian CPI Rises and Keeps the RBA Under Pressure

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Australia’s consumer price index (CPI) increased to 7.3 per cent in October, following a drop to 6.9 per cent the prior month. This rise in inflation levels puts pressure on the Reserve Bank of Australia (RBA) to consider raising interest rates soon.

The RBA has thus far held off on raising rates due to the ongoing economic uncertainty caused by the COVID-19 pandemic. This rise in CPI is a sign that Australia’s economy is beginning to recover from the effects of the virus.

As Westpac note, “The most significant contributors to the annual rise in November were housing (+9.6%yr), food & non-alcoholic beverages (+9.4%yr), transport (+9.0%yr), furniture, household equipment & services (+8.4%yr) and recreation & culture (+5.8%yr).”

The November figures showed that the CPI remained stickily high, with a 0.8 per cent increase keeping inflation at 7.3 per cent for the year compared to an expected 7.2 per cent. This is up from the 6.9 per cent drop in October and marks a significant turning point for Australia’s economic recovery post-COVID-19 pandemic.

The impact of this sustained price hike is yet to be seen. Still, it could present challenges in consumer confidence, and spending as households may struggle with higher costs incurred from day-to-day expenditures such as groceries or petrol costs that have risen significantly since last year.

The RBA will also face increased pressure to raise interest rates, given this consistent rise in inflation levels. However, they are likely not keen on any dramatic changes to the policy during such economically precarious times, given the still uncertain trajectory of COVID-19 cases around Australia and beyond its borders.

As ING points out, “.. today’s data adds more risk to our view that the RBA will stop raising rates once it reaches 3.6% (another two 25bp rate hikes from here), and we may have to raise that to 3.85% if we don’t see some more encouragement from other figures, for example, the labour data.”

It remains uncertain when or whether the RBA will raise interest rates but with these latest figures showing inflation increasing, traders will continue to watch for any changes ahead.

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