Inflation has come in higher than expected, increasing the chances of another Reserve Bank interest rate rise next month.
The official Consumer Price Index from the Australian Bureau of Statistics jumped 7.8 per cent over the year to December.
Economists were generally tipping a 7.5 per cent annual increase in prices, although the RBA had expected an 8 per cent rise in its most recent forecasts from November.
Indeed's Asia-Pacific economist Callam Pickering said continued sharp increases in the cost of essentials, such as groceries and power bills, were putting a lot of strain on people.
"The December figures were nothing short of nasty, with cost-of-living pressures set to provide considerable hardship to households across the nation this year."
"Consumer prices are rising at their fastest pace since 1990. That, of course, marked our nation's last non-pandemic recession. It's a useful reminder of what is at stake if we cannot control inflation soon.
"Persistent inflation of this nature and the monetary policy response required to contain it aren't often consistent with economic growth."
The crucial trimmed mean inflation figure — which excludes the most volatile price moves and is targeted by the central bank — came in at 6.9 per cent for the year to December. Crucially, this is above the 6.5 per cent the RBA had expected.
The market odds for another official interest rate rise next month jumped from around 55 per cent immediately before the data release to more than 75 per cent shortly after, according to Refinitiv data.
ANZ senior economist Catherine Birch said a rate rise next month was almost certain.
"Australia's CPI data showed momentum continued to build in domestically driven inflation pressures in the fourth quarter," she argued.
"This cements a 25-basis-point cash rate hike in February and supports our view of another 25bp hike in March, especially if we see a solid print for fourth quarter wages in mid-February as expected."
Betashares chief economist David Bassanese agreed that the cash rate is likely to rise over the next two months, but he then expects it to peak at 3.6 per cent.
"Thereafter, there is a good chance the RBA could begin to reverse these rates hikes in the second half of the year if growth does slow and inflation eases as widely expected — and especially if the United States economy tumbles into recession," he added.
Stitching together savings
The Reserve Bank is raising interest rates in an effort to get Australians to spend less, with reduced demand putting less pressure on prices.
However, as the Commonwealth Bank's head of Australian economics Gareth Aird pointed out, rate rises slow the economy with a lag.
"The key point is that rapid rate hikes in 2022 will impact demand for goods and services in the economy and by extension price changes in 2023 and 2024," he wrote.
"Monetary policy tightening did not impact price outcomes in 2022."
There are very early signs that this belt tightening is starting.
At a sewing school in Melbourne's west, people are learning to mend and make their own clothes.
In a group of eight, two were battling rising mortgages and two had just had their rent increased, including Honor Wolff.
"Obviously at the moment the cost of living is extremely high with things like bills and rent," she says.
"So luxury items like clothing – which isn't really a luxury item – you feel as if you shouldn't spend on it.
"I didn't even have the budget to spend on new clothes for Summer. I've been darning my boyfriend's socks!"
As well as coping with rising costs, Ms Wolff is also worried about her income from her work in the arts industry.
"The cost of living is high and people might not be wanting to spend money on tickets. It's scary for the arts," she added.
The sewing school's owner, Gaye Naismith, is also worried about people cutting back.
"I am finding people are less inclined to pay for a longer course," Ms Naismith observed.
"We're doing much better with short courses or one-off workshops."
While she does not have a sizeable mortgage and the rent on her business' studio has not yet gone up, she has noticed big price increases for many goods she needs for her business.
"We have been seeing 40 per cent price rises on some of the sewing machines," she said.
Starter packs of thread, needles and materials for her students have also gone up.
"It just feels like a lot of things have doubled."
Travel and power lead price surge
The biggest price rises for households over the last three months of last year were for domestic holiday travel and accommodation (up 13.3 per cent), electricity (up 8.6 per cent) and international travel (up 7.6 per cent).
"Strong demand, particularly over the Christmas holiday period, contributed to price rises for domestic holiday travel and international airfares," said Michelle Marquardt, the head of price statistics at the ABS.
"The rises seen for domestic and international travel were notably higher than historical December-quarter movements."
The ABS said state subsidy schemes continued to cause fluctuations in electricity prices.
"The main factor influencing the rise in electricity prices was the unwinding of the $400 electricity credit offered by the Western Australian government to all households last quarter," Ms Marquardt added.
However, unlike most states across the nation, electricity prices in Western Australia have not risen over the past year.
"This was partially offset by the ongoing impact of the Queensland government's $175 Cost of Living rebate from September 2022, and the introduction of the Tasmanian government's $119 Winter Bill Buster electricity discount for concession households."
Wholesale power prices dropped dramatically late last year, albeit from record highs, raising hopes that might feed through into smaller retail price rises.
Treasurer Jim Chalmers also flagged further actions from the government, which recently intervened to cap gas prices.
"There will be energy bill relief as a centrepiece of the May budget," he told reporters.
Other big price rises over the quarter included recreation and culture (+5.4 per cent), clothing and footwear (+2.6 per cent), and insurance and financial services (+2 per cent).
Over the past year, housing (+10.7 per cent), food (+9.2 per cent), and recreation and culture (+9 per cent) had the steepest price increases.
The 9.2 per cent rise in food costs neatly matches a study into prices at the two major supermarkets, Woolworths and Coles, released by investment bank UBS earlier this week.
The price of meals out and takeaway foods jumped 2.1 per cent just over the last three months of 2022, as restaurants and cafes passed on the rising cost of ingredients and staff.
Editor's note: An earlier version of this article stated that Western Australian consumers had experienced electricity price hikes, however the ABS data show electricity prices in Perth in December 2022 were around the same level as they were in December 2021.
