This week’s surprisingly strong inflation numbers will have hit consumers with a jolt, having anticipated subdued price pressure to continue.
The jump in the rate of inflation will have been as much as a surprise to consumers as it was to economists.
The annual consumer price index jumped to a two-year high of 2.7 per cent after inflation grew at double economists’ expectations in the December quarter.
New data on Thursday indicated consumers had been expecting a more modest acceleration in price pressures over the next year.
The Melbourne Institute’s survey of consumer inflationary expectations for January showed the expected rate of CPI over the coming 12 months to be 2.3 per cent.
This compared with 2.1 per cent in December and was the highest level since August last year but still comfortably within the lower half of the Reserve Bank of Australia’s (RBA) two to three per cent inflation target.
Given the survey was conducted last week, National Australia Bank senior economist Spiros Papadopoulos expects a “jolt higher” when the February report is released.
Rising inflationary expectations can themselves fuel price pressures as workers seek higher wages in compensation.
RBC Capital Markets strategist Michael Turner concedes the latest CPI has diminished his expectation of another interest rate cut by the RBA but believes the central bank has time to wait until March quarter inflation numbers due in April to get a better picture on prices.
“However, it does create some problems for its communication in the meantime,” Mr Turner said in a note to clients.
“We would argue that its easing bias has been as much about instilling confidence in the broader community that rates are not going up anytime soon as about exciting the community that rates might go down again.”
He suspects the bank might seek to play down the numbers for now.
Still, Alex Parsons, chief executive of financial comparison website RateCity, expects dampened enthusiasm over another rate cut could prompt borrowers to consider fixing their home loan.
“The opportunities to lock in a fixed rate under five per cent are there, so it’s attractive for people to be looking into it,” Mr Parsons says.
However, rising price pressures may further undermine consumer confidence, which has already slipped since the September federal election.
A separate survey released on Thursday found weak consumer confidence, a falling Australian dollar and uncertainty about government policy decisions were the top three challenges facing business this year.
Even so, the Commonwealth Bank future business index, which gauges the sentiment of mid-sized businesses with a turnover of $10 million to $100 million, suggests firms are experiencing a sharp increase in confidence.
In the December quarter the index was 17 points, its highest level since the survey began in September 2011, and up from 10.8 points in the previous three months.