ASX 200 tumbles as inflation surprises to the upside

With inflation still running hot, another RBA interest rate hike next month looks increasingly likely.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points
  • The ASX 200 dropped 0.6% following the release of the December quarterly inflation data
  • The Consumer Price Index (CPI) increased 1.9% in the December quarter, bringing the annual inflation rate to 7.8%, above market expectations
  • The RBA meets again on 7 February to determine the next move for interest rates

The S&P/ASX 200 Index (ASX: XJO) was in the green today right up to 11.30am AEDT. Then the benchmark index tumbled 0.6% in a matter of minutes.

That came right after the Australian Bureau of Statistics (ABS) released its inflation data for the December quarter.

As you'd expect by the fall in the ASX 200, those inflation figures came in higher than market expectations.

a man with a moustache sits at his computer with his hands over his eyes making a gap between his fingers so he can peek through to his computer screen.

Image source: Getty Images

What did the ABS report?

The ABS revealed that the Consumer Price Index (CPI) increased 1.9% in the December quarter, bringing the annual inflation rate to 7.8%.

That's significantly higher than economists' consensus forecasts of a 1.6% quarterly increase and 7.6% annual inflation rate. And ASX 200 investors are responding by hitting the sell button today, following a remarkably strong run for the benchmark index so far in 2023.

Commenting on the data, ABS head of prices statistics Michelle Marquardt said:

This is the fourth consecutive quarter to show a rise greater than any seen since the introduction of the Goods and Services Tax (GST) in 2000. The increase for the quarter was slightly higher than the quarterly movements for the September and June quarters last year, both 1.8%.

The 7.8% year-on-year increase in the CPI was predominantly driven by a 17.8% increase in new dwelling prices, a 19.8% increase in the cost of domestic holiday travel and accommodations, and a 13.2% increase in the price of automotive fuel.

Why is the ASX 200 under pressure today?

As mentioned up top, the latest inflation figures have come in higher than the market had priced in. And that's seeing some selling action on the ASX 200 as we head into the lunch hour.

The higher figures matter because it's now more likely that investors can expect another interest rate hike from the Reserve Bank of Australia (RBA).

In an effort to bring inflation back under control, the RBA has already instituted eight consecutive monthly interest rate increases. That commenced with the 0.25% lift on 4 May, which brought the official cash rate to 0.35%.

Today the cash rate stands at 3.10%. And ASX 200 investors are on tenterhooks as to the central bank's next decision when the board meets on Tuesday, 7 February.

With inflation still running hot, the odds of the RBA taking a pause in its tightening path have grown far slimmer.

"Inflationary pressures have not peaked as expected, so we can expect rate hikes to continue or even increase," ASX equities analyst at Stake, Dylan Zhang, said.

"It's likely we'll see a 25bps hike at the next RBA meeting, but a 50bps hike is not unthinkable," he added.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A happy male investor turns around on his chair to look at a friend while a laptop runs on his desk showing share price movements
Broker Notes

Morgans names 3 ASX 200 shares to buy now

Let's see why the broker is recommending these shares to clients.

Read more »

A team of people giving the thumbs up sign.
Share Gainers

This ASX 200 stock has jumped 149% in a year, and brokers tip more upside to come

The business has experienced huge demand across both of its two core business segments.

Read more »

Two IT professionals walk along a wall of mainframes in a data centre discussing various things
Broker Notes

3 reasons to buy NextDC shares today

A leading analyst believes NextDC shares are well-positioned to deliver long-term growth.

Read more »

Young girl peeps over the top of her red piggy bank, ready to put coins in it.
Opinions

NAB shares: Are they cheap enough to buy after the latest drop?

NAB shares are down nearly 10%. Is this a buying window?

Read more »

Broker looking at the share price.
Share Market News

5 things to watch on the ASX 200 on Wednesday

Let's see what awaits Aussie investors on hump day.

Read more »

Woman sitting at a desk shrugs.
Share Gainers

Up over 70% in a month, is it too late to buy Zip shares?

Zip shares keep climbing higher, is there any more upside left?

Read more »

Australian notes and coins symbolising dividends.
Share Market News

2 ASX dividend shares yielding 11% or even more

These ASX dividend-paying shares also offer potential for growth.

Read more »

Drone planting seeds in the ground for the growth of trees.
Share Market News

$5,000 invested in Droneshield shares 5 years ago is now worth…

If you thought Droneshield's 12-month share price increase was high, think again.

Read more »