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Australian inflation surge fuels expectations of interest rate rise

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Elevated fuel and housing costs drove Australian inflation to higher than expected levels in the fourth quarter of 2021, increasing the likelihood of an interest rate rise in the second half of the year.

The consumer price index rose 3.5 per cent in the fourth quarter compared with the previous year, and 1.3 per cent from the third quarter, according to data published on Tuesday by the Australian Bureau of Statistics. Economists had expected a year-on-year rise of 3.2 per cent.

The rapid spread of the Omicron coronavirus variant has added to inflation worries. Food prices have risen on supply chain disruptions as supermarkets, retailers and logistics companies have struggled to source workers owing to the country’s isolation policies.

Michelle Marquardt, head of prices statistics at the ABS, said the most significant price rises in the December quarter were new housing, holiday and accommodation costs and automotive fuel, which surged almost a third from a year earlier.

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“Shortages of building supplies and labour, combined with continued strong demand for new dwellings, contributed to price increases for newly built houses, town houses and apartments,” she said.

Unemployment hit a 14-year low in December, making for a tight job market, but the spread of Omicron and low migration numbers because of strict border policies have led to a labour shortage.

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Shane Oliver, chief economist at AMP, said the data made a rate increase more likely. “So we continue to see the Reserve Bank of Australia raising rates in August with RBA commentary adjusting in a more hawkish direction. At least it’s not the 7 per cent inflation seen in the US,” he said.

Sean Langcake, senior economist for BIS Oxford Economics, said that programmes designed to stimulate residential construction had led to cost inflation for materials and workers, contributing to underlying inflation.

“While some of these cost pressures could still be seen as transitory, we expect the RBA will strike a more hawkish tone at next week’s meeting. A rate rise in 2022 is now more likely in light of these data,” he said.

The RBA said in November that it was unlikely to raise interest rates from its 0.1 per cent level in the short term until inflation was sustainably within its 2-3 per cent target range.

The timing of a potential rate increase could influence Australian elections, which are due to take place in the coming months, with housing prices a crucial issue for voters.

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