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 drop in Inflation Expectations in December mirrored the significant fall in petrol prices in the final month of the year with the average retail price dropping by over 15 cents per litre (see below for comparison chart).

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

The early indications from this year are that the decline in Inflation Expectations at the end of 2022 has continued with the latest weekly reading falling to only 5.1%.

Inflation Expectations are far higher in Country Regions than in the Capital Cities

A deeper look at Inflation Expectations by region shows expectations are consistently far higher in regional areas than in the Capital Cities. At a national level Inflation Expectations were at 6.7% in the Country Areas of Australia compared to 5.6% in the Capital Cities – a difference of over 1% point.

The largest gap is in Victoria with Inflation Expectations at 7.4% in Country Victoria compared to only 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 only 5% in Perth – the lowest Inflation Expectations of any Capital City.

In contrast, the smallest gap is in South Australia with Inflation Expectations at 6.3% in Country South Australia compared to 6.1% in Adelaide – the highest Inflation Expectations of any Capital City.

Inflation Expectations by Capital Cities & Country Regions by State: December 2022

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

Inflation Expectations are highest in South Australia, Queensland and Tasmania

A look at Inflation Expectations on a State-based level bringing together the Country Regions and Capital Cities in each State shows the measure was highest in South Australia at 6.4%, just ahead of both 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 only 5.3%. Inflation Expectations were down from 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: Interviewing an average of 4,700 Australians aged 14+ per month (April 2010-Dec. 2022).

See in the attached PDF for a comprehensive list of RBA interest rate changes during the time-period charted above.

Roy Morgan CEO Michele Levine says Inflation Expectations fell 0.5% points to 6% in December after reaching a more than decade high in November. The large fall in Inflation Expectations appears to presage a peak in inflationary pressures in the final quarter 2022:

“Inflation Expectations fell significantly in December, by 0.5% points to 6% - the largest monthly fall in the index for eight years since December 2014. Despite this large fall, Inflation Expectations were up 1.2% points from 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 the Inflation Expectations in November-December 2022 are set to represent the peak in the index as the latest weekly Inflation Expectations have continued to fall so far in 2023 – now at only 5.1%.

“This is good news for businesses and mortgagors dealing with high inflation and rising interest rates which have increased significantly in 2022 and are set to increase again as soon as next week.

“Last week’s ABS CPI figure for the December quarter 2022 showed annual inflation increasing to 7.8% - the highest for over 30 years since March quarter 1990 (8.7%). Many economists suggest this will represent the peak in inflation for Australia and the decline in Inflation Expectations since early November suggests that the average Australian also foresees inflationary pressures reducing.

“Although the high CPI figure for December quarter 2022 has kept the pressure on the Reserve Bank to continue increasing interest rates at its next few meetings, the indications are that the record interest rate tightening over the last year is starting to put the brakes on the economy.

“The latest ABS Retail Sales figures released for December 2022 show a month-on-month decline of 3.4% seasonally adjusted – the first decline for 2022 after 11 straight monthly increases. The annual increase has been pared to a gain of 7.5% from a year ago – almost in line with the annual CPI figure.

“This is the first major indication of a slowing in the retail boom that has swept Australia in the last two years and is a clear sign that the RBA’s interest rate increases of 3% points in only eight months are starting to really impact consumers.

“The end of the retail boom will reduce inflationary pressures in the economy and likely means there are only a limited number of interest rate increases yet to come – 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 Country Areas have been particularly hard hit by inflation with Inflation Expectations of 6.7% in December, far higher than in Capital Cities at 5.6%.

“Country Victorians have the highest Inflation Expectations of all Country Areas at 7.4% - two full percentage points higher than people in Melbourne at 5.4%. This trend of higher Inflation Expectations in Country Areas is observed in all five mainland States.”

The data for the Inflation Expectations series is drawn from the Roy Morgan Single Source which has interviewed an average of 4,700 Australians aged 14+ per month over the last decade from April 2010 – December 2022 and includes interviews with 5,964 Australians aged 14+ in December 2022.

Inflation Expectations vs. 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