Annual inflation hits 3.8% as childcare fees come roaring back

The government's unwinding of subsidised childcare in 2020 has skewed the latest inflation data, with the annual rate now at 3.8%.

The Australian Bureau of Statistics (ABS) consumer price index (CPI), or inflation, shows a 0.8% rise in prices over the June 2021 quarter, with the index now at an annualised 3.8%.

Throughout the quarter, elevated fuel prices contributed to much of the rise, up 6.5%.

Similar volatility has been seen in the United States, where inflation remains at near 30-year highs.

Head of Prices Statistics at the ABS, Michelle Marquardt, said fuel prices were higher than pre-pandemic levels, after they plummeted to near-20 year lows at the start of the pandemic.

Ms Marquardt also said COVID and government-induced programs mean the inflation rate is temporarily volatile.

"In situations such as this, it is useful to consider underlying inflation measures such as the trimmed mean, which are designed to remove large, one-off price impacts," she said.

"Additional context can be gained by comparing the current CPI to pre-pandemic levels in the March 2020 quarter."

Trimmed mean inflation rose 1.6% on the year, up from 1.1% in the March 2021 quarter, while the five-quarter inflation figure from the March 2020 quarter to the June 2021 quarter was 1.9%.

Asia-Pacific economist from job-hunting site Indeed, Callam Pickering, said these elevated inflation figures are "no cause for alarm".

"It largely reflects base effects from the pandemic a year ago that now drops out of the annual inflation rate," Mr Pickering said.

"Headline inflation right now is practically useless as a measure of genuine inflationary pressure."

The Reserve Bank (RBA) has consistently maintained its stance on inflation being sustained between 2 and 3% before it considers increasing the cash rate, among other factors.

"The Reserve Bank is unlikely to pay much attention to the headline inflation rate," Mr Pickering said.

"A June quarter spike was anticipated - although a little larger than expected - with inflation expected to moderate considerably over the remainder of the year."

Chief Australia Economist at BIS Oxford Economics, Dr Sarah Hunter, said the headline inflation rate was "dramatic" yet "unsurprising".

"The collapse in fuel prices and waiving of childcare fees twelve months ago generated an artificially weak print for June 2020 which has now been reversed," Dr Hunter said.

Looking ahead: What do sustained lockdowns mean for inflation?

Economists have predicted a contraction in the economy in the September quarter, largely caused by lockdowns in NSW and Victoria.

Both Mr Pickering and Dr Hunter said that the lockdowns will also have a 'deflationary' effect on upcoming CPI results.

"Against this backdrop core inflation is likely to remain subdued, and below the RBA’s target, and will confirm the RBA Board’s position that it will be some time before inflation is sustainably within the 2-3% target band," Dr Hunter said.

"So much of the near-term risk to the RBA’s forecasts are now on the downside," Mr Pickering said.

"The outlook for inflation will depend to a large extent on how successfully Sydney manages their current COVID outbreak and the extent to which that causes damage to the economy."

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