Q4 Implicit Price Deflators Reminder Of Extent Of Inflation Problem

Following up from Wednesday’s disappointing GDP data, the implicit price deflators were also disappointingly high. The GDP deflator rose 1.6% q/q and 9.1% y/y, the highest in 34 years, and in terms of domestically-driven inflation, the domestic demand deflator rose 1.3% q/q and 6.5% y/y. After the larger-than-expected easing of January CPI inflation, this is a reminder of the extent of the inflation problem. Following the February RBA statement, another 25bp rate hike in March is highly likely, but the deflators were too high going into 2023 and appeared to be “damaging” real activity. The RBA is unlikely to be finished in March.

• The household consumption deflator rose 1.5% q/q and 6.9% y/y in Q4 after 6.1% y/y. The quarterly paced eased from 2.1% q/q but is still significantly higher than the 0.5% average for the last decade. It is not surprising spending is slowing given not only rate hikes but also the fastest annual pace in the consumption deflator since Q1 1988.
• Real private GFCF was another disappointing component falling 1.7% q/q to be down 1.3% y/y. Again looking at the corresponding deflator, the weakness in investment is not surprising. Businesses are facing the fastest increase in capex prices since the series began in 1986, which doesn’t bode well for the investment outlook. The private GFCF deflator rose 2.3% q/q and 8.8% y/y up from 8.0% in Q3.
• The Q4 national accounts show how high inflation is hurting real activity and that is likely to remain the case throughout 2023. The GDP deflator faces strong negative base effects in Q1 given the 3.7% q/q rise in Q1 2022, so it is likely to show that Q4 was the peak, but this may not be the case for the consumption and investment deflators.
• See GDP Driven By Net Trade, Inventories & Investment Strong Drag and Early Sign That Inflation Has Peaked, 38% Of Index Unchanged