Beware the headlines: Most of December’s CPI “jump” was driven by costly summer travel

Inflation data was released by the Australian Bureau of Statistics (ABS) on Wednesday and the annual increase in the monthly CPI was 3.8%. The increase just for the month of December was 1%.

Prepare for all the predictions that the RBA will be increasing interest rates at their February meeting, to contend with “higher than expected” inflation.

But before the RBA does that, let’s take a closer look. The inflation numbers seem high until you realise the large monthly increase has been driven almost entirely by holiday travel and accommodation.

You read that right. Almost all of the increase in inflation this month was because of higher holiday travel and accommodation prices. It accounted for a massive 98% of the increase.

Who would have thought that holiday prices went up in December’s peak season?

The lion share of the increase in holiday travel and accommodation prices was for overseas holidays, which made up 71% of the monthly increase, with domestic holiday travel and accommodation making up 27% of the monthly increase.

Remember that when you hear commentators and pundits confidently call on the RBA to increase interest rates.

They’re really saying that interest rates should go up to combat the price increase of holidays to Europe in December.

Apparently higher interest rates in Australia can bring down overseas holiday prices.

So big is the increase in holiday prices that if we remove them from just the December quarter figures, the annual headline rate of inflation crashes down from 3.8% to 2.8%, safely within the RBA’s target band of between 2% and 3%.

Now I’m sure that some people are concerned about the price of overseas trips, but let’s look at the price increases of things that everyday Australians have been more concerned with.

Electricity prices have been very volatile. This has been driven by the timing of state and federal subsidies. The annual increase in electricity prices was 21.5%, but in December they didn’t increase at all. They remained at the same price they were in November.

Increases in rents have been a large source of pain for many households in recent years, however their increase is slowing. They increased 3.9% over the last year, down from a 4% increase in November.

Automotive fuel prices, which mainly includes petrol and diesel, was flat having fallen slightly over the last 12 months. Insurance, another recent pain point, has increased only 2.6% over the last year.

All of this shows slowing inflation in these important areas.

The RBA pays close attention to the trimmed mean, which aims to exclude volatile items to get a better idea about what is happening. The trimmed mean increased 3.3% for the last year, up from 3.2% in November. But looking closer, we see that these figures are almost identical, and the difference is largely because of rounding (3.27% versus 3.22%).

 

This is all happening at the same time the ABS has changed how it measures inflation. They are moving from a quarterly to monthly CPI. If this change happened when inflation was low and stable, it would be easy to work out what differences the change was causing.

But over the last four years inflation has been elevated and volatile. This makes the whole process a swirling mess of uncertainty. What impacts are because of actual changes in inflation and what is because of the changes in measurement?

What most people will be wondering is what impact will these latest figures have on interest rates.

Hopefully the RBA will look at these figures in the broader context. The previous drivers of inflation appear to be fading and there is uncertainty around what the actual inflation figures are saying. In such a situation more time is needed to work out exactly what is happening.

What we can say is that December was the worse time to travel first class. That might be sad for those who want to travel the world, but it is hardly a compelling case to increase interest rates on the rest of us.