Inflation Expectations dropped 0.5% points to 6.0% in December 2022 and are far higher in Country Areas

In December 2022, Australians expected inflation of 6.0% annually over the next two years, down 0.5% points from a decade high of 6.5% reached in November. The decline in inflation expectations in December reflected the significant drop in petrol prices in the final month of the year with the average retail price falling by more than 15 cents per liter (see below for comparison chart).

Inflation expectations in December are 1.2% points higher than a year ago and 2.4% points higher than two years ago in December 2020. Inflation expectations are now significantly lower than the ABS CPI figures for the year to December 2022 which showed that consumer price inflation reached a 32-year high of 7.8%.

The early indications this year are that the decline in inflation expectations has continued at the end of 2022 with the latest weekly reading falling to just 5.1%.

Inflation expectations are much higher in rural areas than in the capital cities

A deeper look at inflation expectations by region shows that expectations are consistently much higher in regional areas than in the capital cities. At the national level, inflation expectations were at 6.7% in rural Australia compared to 5.6% in the capital cities – a difference of more than 1 percentage point.

The biggest gap is in Victoria with inflation expectations at 7.4% in Country Victoria compared to just 5.4% in Melbourne – a gap of 2% points.

There is also a large gap in Western Australia with inflation expectations at 6.2% in country Western Australia compared to just 5% in Perth – the lowest inflation expectations of any capital city.

In contrast, the narrowest gap is in South Australia with inflation expectations at 6.3% in South Australia compared to 6.1% in Adelaide – the highest inflation expectations of any capital city.

Inflation expectations by capitals and regions by state: December 2022

Source: Roy Morgan Singles Source: December 2022, n=5,964. Base: Australians 14+.

Inflation expectations are highest in South Australia, Queensland and Tasmania

A look at inflation expectations at a state-based level, which brings together the regions and capitals in each state, shows the measure was highest in South Australia at 6.4%, just ahead of Queensland and Tasmania at 6.3%.

Inflation expectations were in line with the national average in New South Wales at 6.0%.

Inflation expectations in Victoria were just below the national average at 5.9% and well below the national average in Western Australia at just 5.3%. Inflation expectations were lower than a month ago in all states except Tasmania.

Inflation Expectations Index Long Term Trend – Expected annual inflation in next 2 years

Source: Roy Morgan Single Source: Interviews an average of 4,700 Australians aged 14+ per month (April 2010-Dec 2022).

See the attached PDF for a comprehensive list of RBA interest rate changes during the period diagrammed above.

Michele Levine, chief executive of Roy Morgan, says inflation expectations fell by 0.5% points to 6% in December after reaching a more than decade high in November. The large drop in inflation expectations appears to predict a peak in inflationary pressures in the last quarter of 2022:

“Inflation expectations fell significantly in December, by 0.5% points to 6% – the biggest monthly drop in the index for eight years since December 2014. Despite this big drop, inflation expectations were 1.2% points higher than ‘ a year ago and were at their second highest monthly level all year – behind only the decade high of 6.5% in November.

“The early signs this year are that November-December 2022 inflation expectations will represent the peak in the index, as the latest weekly inflation expectations have continued to fall so far in 2023 – now at just 5.1%.

“This is good news for businesses and mortgage lenders dealing with high inflation and rising interest rates which have risen significantly in 2022 and are expected to rise again as soon as next week.

“Last week’s ABS CPI figure for the December quarter 2022 showed that annual inflation increased to 7.8% – the highest in more than 30 years since March quarter 1990 (8.7%). Many economists suggest that this will represent the peak in inflation for Australia and the decline in inflation expectations since early November suggests that the average Australian also expects inflationary pressures to ease.

“While the high CPI figure for December quarter 2022 kept pressure on the Reserve Bank to continue raising interest rates at its next few meetings, indications are that record interest rate tightening over the past year is putting the brakes on the economy .

“The latest ABS retail sales figures released for December 2022 show a month-on-month fall of 3.4% seasonally adjusted – the first decline for 2022 after 11 straight monthly increases. The annual increase was compared to a gain of 7.5% over a year ago – almost in line with the annual CPI figure.

“This is the first major indication of a slowdown in the retail boom that has hit Australia over the past two years and is a clear sign that the RBA’s interest rate hikes of 3% points in just eight months are really starting to affect consumers.

“The end of the retail boom will reduce inflationary pressure in the economy and probably means that there are only a limited number of interest rate increases ahead – the futures market is pricing in three more interest rate increases of 0.25% in the next few months. .

“This will be welcome news for Australians dealing with high inflation and rising interest rates. People living in rural areas have been hit particularly hard by inflation with inflation expectations at 6.7% in December, much higher than in capital cities at 5.6%.

“Rural Victorians have the highest inflation expectations of all rural areas at 7.4% – two full percentage points higher than people in Melbourne at 5.4%. This trend of higher inflation expectations in rural areas is observed in all five continental states.”

The data for the Inflation Expectations series comes from the Roy Morgan single source which interviewed an average of 4,700 Australians aged 14+ per month over the past decade from April 2010 – December 2022 and includes interviews with 5,964 Australians aged 14+ in December 2022.

Inflation expectations versus average retail petrol prices: January – December 2022

Source: Roy Morgan Single Source: January 2022 – December 2022. Average interviews per month: n=6,278. Petrol prices: Australian Institute of Petroleum (weekly price reports): http://www.aip.com.au/pricing/weekly- prices-reports