The latest official inflation figures are expected to be the highest since the global financial crisis, and at least one leading economist has warned they could trigger an extra large first interest rate hike from the Reserve Bank.
The Australian Bureau of Statistics Consumer Price Index (CPI) for the first three months of the year comes out on Wednesday at 11:30am AEST.
It does not take an economics degree for most Australians to figure out prices have been rising fast over recent months, but the experts do have a range of forecasts on just how much the cost of living has gone up.
According to Refinitiv, the typical forecast is for prices to have risen by 1.7 per cent over the first few months of this year, and 4.6 per cent since this time last year.
If accurate, that would be the biggest annual consumer price increase since CPI jumped 5 per cent in the year to September 2008, which immediately preceded the peak of the global financial crisis.
But some economists are forecasting even bigger price rises still.
Westpac is tipping a 2 per cent jump in consumer prices over the past quarter and a 4.9 per cent surge over the year.
"The biggest contributor is the cost of building a house, which of course includes building construction materials, construction wages, and the margins that developers are able to get," the bank's chief economist Bill Evans told the ABC's RN Breakfast program.
Westpac is expecting new house purchases to have seen a 5.4 per cent price increase just over the first few months of the year, largely driven by the federal government's HomeBuilder subsidy — grants that had previously kept inflation in this sector artificially low while stoking demand that, combined with materials and labour shortages, has sent construction costs soaring.
Now the effect of the grant has worn off, the full extent of construction cost increases is showing up in the numbers.
Fuel is also another major source of surging inflation, with a forecast 10.9 per cent jump in March quarter prices preceding the government's budget move to halve fuel excise for six months, which should see much of that increase reversed in the current June quarter.
Finally, a 6.6 per cent surge in fruit and vegetable prices, leading a 2.1 per cent quarterly jump in food prices overall, is the other biggest contributor.
But, even stripping out the biggest price increases, along with the weakest ones, the Reserve Bank's preferred measure of 'underlying' or 'core' inflation — the trimmed mean — is still widely expected to be 1.2 per cent for the quarter and 3.4 per cent for the year.
This is both the consensus forecast and Westpac's expectation.
"The big message from the underlying inflation is that it's widely distributed," Mr Evans said.
"Normally, when we look at the so-called trimmed mean, which is the core numbers, it ranges from some negatives to some positives. This time, there's no negatives."
Westpac tips 40-basis-point rate rise
If inflation comes in close to its forecast, and unemployment falls down to 3.8 per cent as Westpac expects when the April figures are released in mid-May, the bank is now expecting the Reserve Bank's first move to be an unusually large one.
"There is considerable speculation that they'll move on the 3rd of May, but I think that's really been ruled out by the guidance that we've seen from the Reserve Bank about wanting to see data over the coming months," Mr Evans said.
"We did expect that they'd only go by 0.15 [percentage points] but now, with this much stronger inflation environment, much stronger labour market, I think the need is there to go faster than that.
If Mr Evans and his team are right, that means the cash rate would rise to 0.5 per cent on June 7, with their forecast that it would peak at 2 per cent some time next year.
Aside from the domestic inflation pressures forcing the RBA to act, Mr Evans also cited recent and forecast aggressive rate hikes overseas, which threaten to leave Australia's central bank well behind.
"The Federal Reserve is going to be raising rates in early May by 50 basis points, and then another 50 basis points just after the June 7 board meeting of the RBA," he said.
"And we've recently seen the Bank of Canada and the [Reserve] Bank of New Zealand raising rates by 50 basis points.
"So the theme around the world, in the developed world, is you should go by 50s. Now, we don't think the Reserve Bank will see the need to do 50 [basis points] at this stage. But we do think there'll be a need for some catch-up."
'The only real argument for delay is the federal election'
The Reserve Bank has indicated that it is waiting for further information not only on inflation but also on wages before it starts to lift interest rates.
The next Wage Price Index comes out on May 18 and April's unemployment data will be released on May 19, just two days before the federal election.
However, while he does not believe the RBA will raise interest rates on May 3 before receiving that data, Mr Evans is also now convinced the Reserve Bank will not delay the first rate rise past June, regardless of what that labour market data reveals.
"I don't think there's any doubt that the pressures in the labour market are starting to show up in in wages as well," he said, when asked whether weaker-than-expected wages or jobs data might give the bank pause for thought.
Some other economists are urging the RBA to act sooner, to avoid shocking households with a larger interest rate rise in June.
BetaShares chief economist David Bassanese pointed to renewed supply bottlenecks threatening further price rises, and the likelihood of very aggressive US Federal Reserve rate hikes, as a reason to move in May.
"I now think the RBA should, and likely will, raise interest rates next week by 15 basis points — the case to hike is so obvious it need not feel bound by next month's wage report," he wrote.
"From a presentational viewpoint, moreover, it is also seems best to peg the first rate hike on a high inflation number, rather than an only modestly high wage number.
"This is also a risk that the wage price index might reveal still surprisingly low wage growth — leaving the RBA without as clear a justification to hike.
"All up, I think the RBA should, and will, conclude it makes more sense to start off slow with, 15 basis points next week, following the CPI, followed by a traditional 25-basis-point move in June.
AMP Capital chief economist Shane Oliver broadly agreed that the Reserve Bank should not wait for the wages data later in May before lifting rates.
"The Reserve Bank really should be starting to raise rates as soon as possible but, of course, we know that the election is getting in the way," he told Peter Ryan on ABC News Radio.
"If they do leave it to June they're more likely to go, and there is a very strong argument for them to go, by 0.4 per cent to get that cash rate up to 0.5 per cent."
Even a financial crisis couldn't stop rate rises in 2008
Mr Evans says the Reserve Bank will tread carefully because Australia's current level of household debt makes people extremely sensitive to interest rate rises, hence Westpac's forecast of the cash rate target topping out at 2 per cent — rival CBA has an even lower forecast for the rate peak, of just 1.25 per cent.
However, he also told RN Breakfast that the Reserve Bank is very committed to its 2-3 per cent inflation target, as demonstrated the last time price rises threatened to get out of control in 2007-08.
"Underlying inflation jumped from 2.9 per cent to 3.6 per cent. We're talking about 3.4 per cent this time, with a likely further increase in the next quarter," he said.
"The central bank was so worried about that jump from 2.9 to 3.6 [per cent] that it actually raised interest rates twice in in February and March of 2008, after having got that December quarter number.
"Bear in mind, at the time, we realised that the world was facing a financial crisis and, yet, the Reserve Bank was prepared to push rates hard, because of their concern about inflation."
Those two 25-basis-point rate increases in February and March 2008 took the RBA's cash rate target to 7.25 per cent, even as US authorities were organising a bailout and takeover of failing investment bank Bear Stearns.
Official rates remained at 7.25 per cent until being slashed in a series of large emergency rate cuts from September 2008 onwards as investment bank Lehman Brothers collapsed and the global financial crisis threatened a worldwide depression.
"So the rate was well above whatever we thought was neutral at the time," Mr Evans recalled.
"Whereas, now, of course, it's 0.1 [per cent] and we're a long way below neutral.
"Neutral is lower now than it was in that period, but it's certainly well below neutral at this stage.
