Local inflation data due out on January 25 for the December quarter will provide further evidence of the extent of price pressures in the economy.
Bank of Queensland chief economist Peter Munckton said local data would give an indication of the extent to which global price increases are being replicated in the domestic economy.
“The combination of strong demand and supply constraints suggests that the cash rate will rise,” he said.
“Labour shortages will remain a problem this year.
“In practice, if inflation is at the upper end of the 2-3% target range and wage growth is close to 3%, that may be enough for the RBA to start raising the cash rate.
“The overwhelming majority of economists expect a rate change by the end of the first half of 2023.”
Financial market pricing is for the RBA to raise interest rates in July this year, but RBA Governor Philip Lowe in December dismissed talk of an interest rate hike in 2022 and has indicated that it would probably be delayed until 2023 or 2024.
Dr Lowe wants to see wage growth above 3% to have confidence that inflation will hold around the midpoint of the RBA’s 2-3% target range.
Vacancies hit a record high of 396,100 in the three months to Nov. 30 and businesses are struggling to fill shifts due to the isolation of people linked to COVID-19.
Treasury Secretary Steven Kennedy told the national cabinet on Thursday that worker absenteeism rates could reach 10% of the country’s 13 million workers at any time as the virus peaks.
ANZ Economist David Plank said: “With supply chain pressures unlikely to have eased significantly and overall demand increasing after lockdowns ended, we believe inflation is expected to have picked up further in the last quarter of last year.”
“Supply chain disruptions resulting from the spread of the omicron are likely to add further upward pressure on prices in the first quarter of this year,” he said.
Mr Plank expects the RBA to raise interest rates in the first half of 2023.
“It’s still hard to see a rate hike in 2022,” he said.
“I think the trend for the RBA will be to look at supply-side issues and mitigate them.”
“They will want to see wage growth materialize.”
The RBA will hold its first board meeting of the year on February 1 and release new economic forecasts that week.
Economists from ANZ and Barclays are among those expecting the RBA to end its $4 billion-a-week government bond buying program at the February meeting.
The RBA’s preferred measure of underlying inflation jumped 0.7% more than expected in the September quarter, taking the annual rate to 2.1% and inside the target range of 2 to 2. 3% from the bank for the first time in six years.
ANZ expects core inflation to rise 0.8% in the December quarter and the annual rate to accelerate to 2.4%.
“If inflation is as strong as expected, it will likely add to the already aggressive spot rate pricing in Australian dollar markets,” Plank noted.