Election campaign rate rise now in the mix as inflation surges

A big surge in inflation in the March quarter will place the Reserve Bank of Australia (RBA) under enormous pressure to follow its 2007 precedent and lift rates next week in an election campaign.

Annual inflation hit 5.1% after a higher-than-expected 2.1% rise in inflation in the three months to March. Inflation is now at its highest levels since the introduction of the GST more than 20 years ago, driven by rises in housing costs, fuel costs (which will start abating following oil price falls in recent weeks) and tertiary education.

The Australian Bureau of Statistics pointed out that supply chain issues are now having a real effect on inflation. “Continued shortages of building supplies and labour, heightened freight costs and ongoing strong demand contributed to price rises for newly built dwellings… Notable rises were also recorded across the food group (+2.8 per cent), reflecting high transport, fertiliser, packaging and ingredient costs, as well as COVID-related disruptions and herd restocking due to favourable weather.”

The RBA’s preferred measures, the trimmed mean (3.7%) and weighted median (3.2%), were both above the its target inflation band of 2-3% and seem to remove any doubt that the RBA will move quickly to lift interest rates — and potentially by significant increments. Whether it does so at its next meeting, on Tuesday, looms as a key test of the RBA’s independence. A rate rise will inflict massive damage on the Coalition’s claims to being the superior economic manager.

The 2007 election rate rise generated more than a decade of ill will in John Howard, Peter Costello and parts of the Liberal Party, which is still showing up in the demands for a “review” of the central bank.

How does Australia’s inflation compare internationally?

The US reported a headline rate of 8.5% in the year to March, the highest since 1981, rising from a 7.9% rate in February. Month on month, the rate was up 1.2% and the core rate was an annual 6.5%. The Federal Reserve has already raised its key rate by 0.25% and will add at least a 0.50% boost to that next Wednesday.

Across the Tasman, the Reserve Bank of NZ (RBNZ) has already lifted rates three times — the last being a 0.50% boost, and that was before the CPI rose a headline 6.9% up from 5.9% in December. The quarter on quarter rise was 1.8%. That inflation data was released after the last RBNZ decision, so another rate rise is tipped next month.

The UK annual rate was 7% in March (and the OECD rate was 7% in February). The UK lifted its key Bank Rate 0.25% in March to 0.75%, the third rate rise (like the RBNZ) and the rate is now back to pre-COVID levels.

Euro area consumer inflation rose to a headline rate of 7.4% in March, the highest since the euro was introduced in the early 1990s and up from 5.9% in February. Month on month, the rate rose 2.4% thanks to the impact of higher energy prices from Russia’s invasion of Ukraine.

China is the outlier: its headline inflation rate is 1.5%, up from 0.9% in February. China’s core rate was 1.1% in March, unchanged from February, so there is no rate rise on the horizon, given COVID infections and the brutal government reaction pushing the economy towards a recession.

Canada’s inflation rate jumped to 6.7% in March, up 1% from the 5.7% rate in February while core inflation rose 5.5%. The Bank of Canada lifted its key rate 0.50% to 1% in April and, like the RBNZ, is seen as lifting rates again in May.

Next Tuesday afternoon at 2.30pm has suddenly become one of the most important moments in the election campaign.