Australia’s softening inflation unlikely to spell an end to interest rate hikes

When normally well-to-do shoppers of inner-west Sydney start trimming spending on fruit and vegetables, it’s a hint that households everywhere are feeling the pinch.

“Now people are really conserving what they are spending on,” said Yousef Lakda, owner of the Nature Spot greengrocer in Rozelle. “They walk in, they check your prices and they walk out and go and compare the prices … it wasn’t [like that] before.”

Food inflation at Australia’s biggest supermarket chains Coles and Woolworths quickened to an annual pace of 9.2% in the December quarter from 8.2% in the September quarter, UBS said this week.

Prices have come down at Nature Spot compared with their peaks last year, and Lakda hopes that without a repeat of flooding or other extreme weather in key farming areas, the worst of the rises might be behind us.

• Sign up for Guardian Australia’s free morning and afternoon email newsletters for your daily news roundup

Economists also predict the peak of the inflation threat may have passed. They forecast the December quarter consumer price index, due out on Wednesday from the Bureau of Statistics, will reveal an annual increase of about 7.5%.

While the highest since 1990, such a number would only be marginally higher than the 7.3% pace recorded in the September quarter, and shy of the 8% figure the Treasury and Reserve Bank of Australia tipped as the top of the current cycle.

However, inflation figures were typically higher than expected in 2022, particularly the March quarter’s 5.1%. The RBA responded by lifting its cash rate from a record low 0.1% in early May, and repeated the action each of the next seven months.

The RBA looks more closely at the trimmed mean measure of CPI – which strips out the more volatile price movement – rather than the headline one.

Economists predict the trimmed mean will come in at 6.4% for the December quarter, up from 6.1% in the previous quarter, and a new high for a series that started in 2003.

The ANZ has among the highest forecasts for December-quarter inflation, tipping 7.7% for CPI and 6.7% for the trimmed mean.

Either gauge is well above the RBA’s inflation target band of 2%-3%, which is why the RBA will likely have three more 25 basis-point increases by May to bring the interest rate to 3.85% before the hikes end, ANZ says.

“Whether it’s petrol, whether it’s food, they really come up quite strongly and increase that part of the [CPI],” Adelaide Timbrell, a senior ANZ economist, said. “And they can come down quite quickly as well.”

However, “the part of inflation that the Reserve Bank cares about will still be way above the [target] band at the end of 2023”, Timbrell said.

The bowser has lately been one area households and businesses could find some modest pricing relief.

Petrol prices are roughly back to where they were before the Albanese government restored the full fuel excise of 46 cents a litre at the end of September.

Fuel prices probably clocked a 2% increase during the December quarter alone, reflecting that full excise return, Timbrell said. Still, that’s a 2 percentage points slower pace of rises than during the mid-2022 peak.

“It’s more likely than not that we will see fuel inflation a lot lower in 2023 compared to what we saw in 2022,” she said.

Energy costs, particularly for electricity, may be the main propellant for higher prices in the December quarter, and for a while yet.

ANZ expects that electricity prices jumped 13% in the final three months of the year alone, which would be the largest quarterly increase since the introduction of carbon pricing in 2012.

As there are more increases to come – notwithstanding the federal government’s cap on gas and coal prices – electricity prices are “likely to put some pressure on household discretionary spending through this year as well,” Timbrell said.

December-quarter inflation for so-called “non-discretionary” goods and services that consumers can’t easily avoid – mostly food, fuel, utilities, health and housing – will probably come in at just above the record 8.4% annual rate set in the July-September period, said Catherine Birch, a fellow senior ANZ economist.

That, too, “should be the peak”.