Recession fears if interest rates hiked

One of the nation's biggest consultancy firms has painted a bleak picture for the year ahead, saying Australians are at the mercy of the central bank, while warning of a possible recession.

Deloitte Access Economics says economic growth will slow dramatically in 2023 as the consumer-led recovery runs out of steam.

Falling house prices, rising interest rates, high inflation, low levels of consumer confidence and negative real wage growth are expected to create a perfect storm of economic challenges.

The consultancy warned of the potentially devastating consequences if the Reserve Bank increased the cash rate again.

The RBA started hiking interest rates in May last year to curb inflation.

The official cash rate is sitting at 3.1 per cent, with another 25 basis point increase broadly anticipated when the central bank board meets in February.

"Any further increases in the cash rate beyond the current 3.1 per cent could unnecessarily tip Australia into recession in 2023," partner Stephen Smith said.

"At the same time, real household disposable income per capita - a key measure of prosperity - is falling, and will finish the current financial year at levels last seen before the onset of the pandemic.

"There is no doubt that Australian households are starting to hurt."

The damage won't be spread evenly across the country, with southeastern states with higher levels of consumption and pricey housing tipped to bear the brunt of the economic slowdown.

Prime Minister Anthony Albanese said Australia had strong fundamentals that would protect the nation from worsening economic conditions.

He said demand for labour was robust, with the unemployment rate sitting at a near-50-year low of 3.5 per cent.

Inflation, which hit 7.3 per cent in November, is also on track to peak lower than the closer to eight per cent expected last year.

"We will continue to monitor the economy, which is very volatile globally, and we are exposed to a lot of those global issues, but the fundamentals here in Australia are still very strong," he said.

Deloitte's recession warning comes ahead of December quarter inflation numbers on Wednesday.

While headline inflation is tipped to come in just shy of the RBA's eight per cent peak prediction, ANZ economists think core inflation will exceed the central bank's expectations.

Economist Catherine Birch said trimmed mean, non-tradables and services inflation were the key measures to watch in the CPI release as these indicators accurately depict underlying inflationary pressures in the economy.

The bank's economists have bolstered their trimmed mean forecast from 1.6 per cent quarterly growth to 1.7 per cent

Ms Birch also expects a significant 1.9 per cent quarterly uptick in services inflation as strong demand for workers drives up labour costs.

The bank's economists imagine strong underlying inflation will keep the RBA hiking rates well into 2023, with ANZ sticking with its terminal cash rate pick of 3.85 per cent.

"We think it would take a downside surprise in trimmed mean CPI relative to the RBA's forecast for it to consider a pause in cash rate hikes in the next few months," Ms Birch said.