Broadening price pressures to prompt rate hikes

RBA Governor Lowe noted in a recent speech that the Bank no longer has specific criteria for deciding whether inflation is sustainably in the target range. But he highlighted that along with the actual rate of inflation and the outlook, the breadth of price increases would be important. There can be now doubt that price pressures have broadened: a greater share of prices is now rising at a pace above 1% q/q than at any point since the GFC. Admittedly, just two items – petrol and the cost of new dwellings purchased - accounted for 40% of the 1.3% q/q rise in consumer prices in Q4. However, business surveys suggest that cost pressures have intensified sharply in recent months, so the share of CPI items with strong price hikes is set to rise further. And with trimmed mean inflation set to approach 4%, we expect the RBA to start hiking interest rates in June.