Australia's inflation hits 32-year high at 7.3%, pressuring rates and household budgets

Australia's inflation accelerated sharply in the September quarter, reaching 7.3% annually—the fastest pace in thirty-two years. The Australian Bureau of Statistics released the figures on October 26, 2022, and they landed harder than economists had predicted. Markets had braced for a 7% rise; the actual number exceeded that, and it came with a quarter-on-quarter jump of 1.8%, also beating forecasts of around 1.6%. The last time inflation moved this fast was June 1990.

The pressure is most acute where it hurts most. Non-discretionary inflation—the prices of things households cannot simply stop buying, like food, automotive fuel, housing, utilities, and health care—climbed to 8.4% in the quarter, up from 7.6% three months earlier. The Australian Bureau of Statistics called it a new high. By contrast, discretionary inflation, the cost of goods people can defer or do without, rose only 5.5%. The gap between the two tells the story: ordinary Australians are being squeezed hardest on the essentials.

Three categories drove the acceleration. Building new dwellings climbed 3.7%. Furniture prices jumped 6.6%. But gas—the fuel that heats homes and powers electricity generation—surged 10.9% in just three months. That last figure carries particular weight because of a policy choice made by both major parties over the past decade. Australia exports the bulk of its natural gas production, yet east coast consumers now pay global prices for the fuel. Western Australia, by contrast, capped its increases by reserving 15% of output for domestic use. Because gas often sets the wholesale price for electricity, the spike in gas costs rippled directly into power bills. Electricity prices rose 3.2% for the quarter, though government credits in Western Australia, Queensland, and the Australian Capital Territory blunted the increase. Without those schemes, the Australian Bureau of Statistics calculated, electricity would have risen 15.6%.

Treasurer Jim Chalmers acknowledged the bind. "I'm not going to pretend that we're not worried about these electricity prices," he told reporters during the budget lock-up. He blamed the war in Ukraine for disrupting energy markets and pointed to a decade of policy indecision on energy. "I think any responsible government facing these kinds of price hikes needs to consider a broader suite of regulatory interventions than they might have considered in years gone by," he said. When pressed on specifics—whether that meant price caps—Chalmers declined to narrow the conversation, saying the government was weighing options beyond simply mailing cheques to households. "I'm not convinced that is the best way to deal with that because of our inflation challenge and our budget challenges," he said. "I think a smarter thing to consider is whether we can do something in the energy market itself."

The underlying inflation figure that keeps central bankers awake also deteriorated. The trimmed mean—the Reserve Bank's preferred measure, which strips out the most volatile items to reveal the "real" inflation trend—hit 6.1% annually, up from 4.9% in the June quarter. That acceleration matters because the Reserve Bank targets inflation of 2 to 3 percent. At 6.1%, underlying inflation is more than double the ceiling. The trajectory suggests more interest rate rises are coming.

Meanwhile, wage growth has not kept pace. Non-union enterprise bargaining agreements averaged just 2.4% growth over an average contract length of four years. That means workers locked into those deals are losing ground in real terms—their pay rises are worth far less than the inflation eating into their purchasing power. The federal budget had pencilled in a peak headline inflation rate of 7.75% by year's end, but with non-discretionary inflation already at 8.4% and climbing, forecasters were beginning to wonder whether that projection would prove too optimistic. If inflation continues accelerating, non-discretionary prices could approach 10%.

State and territory leaders, meanwhile, were already positioning themselves around the budget's implications. Queensland Premier Annastacia Palaszczuk welcomed an extra billion dollars in health funding but signalled she would continue pushing for a 50-50 split between federal and state governments on hospital costs. Victoria's Daniel Andrews vowed to fight for the same arrangement after the temporary pandemic funding arrangement expires in December. The Australian Medical Association had previously called for that Covid funding to be extended to 2025 and for a long-term commitment to equal partnership. Under the current long-term agreement, the federal government contributes 45% of hospital funding but also caps growth when it exceeds 6.5%—a constraint that becomes more binding as inflation accelerates.