Monthly inflation data released by the Australian Bureau of Statistics on Wednesday showed a slowing of the consumer price index (CPI), in an early sign the RBA’s string of rate hikes may be taking hold.

Headline CPI rose 6.9% in the year to October 2022, down from 7.3% the previous month and below market expectations. The S&P/ASX200 rebounded into positive territory on the back of the news, gaining 0.43% by market close.

Head of equity research at Morningstar, Peter Warnes, said the result was surprisingly good news however, warned investors should remain cautious. Unlike the quarterly CPI, the monthly read does not take all categories into account, he said.

“October data only reflects up to date price information on 62% of the CPI basket,” he says.

“It doesn’t fully appreciate what housing has done […]. It doesn’t take full account of food and non-alcoholic beverages which also went up, it only takes into account less than one-third of transport costs and it doesn’t take into account insurance and financial services,” Warnes added.

It’s the second economic release this week to come in softer than expected, with October retail trade data on Monday declining 0.2% – the first monthly fall this year.

But Warnes says the drop in retail turnover may have been caused by consumers holding out for Black Friday and Cyber Monday sales.

“Whether the sales are postponed is moot because consumers are still out there throwing money at the economy and that will show up in the November sales,” he said.

“It appears come hell or high water, nothing is going to stop households from having a buoyant festive season,” he added.

Transaction data from NAB shows Australians spent more than $7.1 billion across the four-day Black shopping event.

Full impact of rate hikes still to be felt

Warnes expects meaningful change in consumer behavior will occur in 2023, once the full impact of the RBA’ rate hikes materialise.

“I think you’re going to see a meaningful change going forward to 2023,” he said.

“Forget about the historical stuff and try to look forward to what’s likely to occur in 2023. There's no doubt in my mind that household consumption and its rate of growth will subside,” Warnes added.

Morningstar’s director of equity research Johannes Faul said retail spending remains very healthy with volumes of some categories – such as apparel, household goods and recreational goods - much higher than the 10-year trend.

“We’re still buying more stuff than we have over the past 10 years,” he says.

Faul, like Warnes believes the rate hikes implemented by the RBA this year will begin to curb consumer demand next year.

“So, all those high volumes we’ve seen are going to get pushed down a bit more as those interest rates hikes that have already happened actually starts biting the consumer.”

According to the RBA, the lag between changes in monetary policy and its effect on economic activity inflation and consumer behavior can take between 12 and 24 months for maximum effect.

Faul says consumers will feel the full impact of what has already happened by mid-next year.

“The RBA’s rate hikes will be the catalyst in forcing consumer spending down,” he says.

 

RBA Governor apologises for pandemic communication

 

RBA governor Phillip Lowe told a Senate committee on Monday that he is sorry for saying interest rates were expected to remain at record lows until 2024, conceding many households had made purchasing decisions based on the forward guidance.

 

“I am certainly sorry if people listened to what we said and acted on what we said and now regret what they’ve done,” he said.

 

When questioned about why the RBA hiked rates before real wage growth had occurred, a pre-condition set by the Board, Lowe said that nominal wages had grown, and the job of the RBA is a nominal one.

 

"We also thought that given the dire outlook it was unlikely that inflation would pick up quickly and we wanted to send a message that interest rates were going to stay low for a long period of time,” said Lowe.