Inflation has officially hit a six-month high, rising to four per cent and putting a rate rise back on the table.
Investors and economists expect the Reserve Bank to raise interest rates as soon as August, following the latest inflation data that reveals price pressures remain stubbornly high. The monthly consumer price index (CPI), a key measure of goods and services costs across the economy, surged to 4% in the year to May, according to the Australian Bureau of Statistics. This is up from 3.6% in April and well above economists’ expectations of a modest lift to 3.8%.
The annual headline inflation rate, excluding volatile items such as holiday travel, fruit, vegetables, and automotive fuel, eased slightly to 4%, down from 4.1% a month earlier. However, this did little to alleviate concerns about the ongoing struggle to contain inflation.
Traders immediately reacted to the news, increasing their bets that the Reserve Bank would raise interest rates for the 14th time since May 2022. Money markets now ascribe a 54% chance of a rate hike at the central bank’s September meeting and odds above 40% for an August increase. Prior to the release, markets had ascribed only a 13% chance of an increase to the cash rate in August.
Economists have also revised their interest rate forecasts in response to the hotter-than-expected result. Some analysts expect Governor Michele Bullock to announce a 25-basis-point increase after the Reserve Bank’s next board meeting, scheduled for August 5-6. “Unless there is a stunning reversal in underlying inflation pressures in the month of June, we think that another material beat on the RBA’s near-term forecasts for trimmed mean inflation is looking very likely,” said Deutsche Bank chief economist Phil O’Donaghoe. “That should prompt a rate hike,” he added, a view shared by economists at UBS and Judo Bank.
However, not all analysts agree. Some expect the Reserve Bank to remain on hold, with many deferring an expected easing of interest rates until early 2025. “The RBA should hike but may well tolerate higher inflation to protect the labor market, which suggests no scope for any easing until well into 2025 and a cash rate that may well stay on hold for the foreseeable future,” said RBC chief economist Su-Lin Ong. Forecasters at Westpac remain among the few still expecting a rate cut before year’s end, while Commonwealth Bank said it would review its forecasts for a November rate cut following the surprise inflation result.
Treasurer Jim Chalmers downplayed the unexpected inflation reading, citing other advanced economies that have also experienced a rebound in inflation.
“We’ve seen around the world that inflation can be volatile and doesn’t always decrease in a straight line. The last mile can be particularly challenging,” Dr. Chalmers explained.
Opposition treasury spokesman Angus Taylor, on the other hand, blamed the Labor government for exacerbating price pressures, accusing them of being “out of touch with economic reality.”
“This is what happens when you have a big-spending government that fails to acknowledge the economic reality,” Mr. Taylor said. “We’ve now had four months in a row of accelerating core inflation, which will undoubtedly be a concern for the independent Reserve Bank.”
The stronger-than-anticipated inflation result was partly due to a 5.2% rise in housing costs over the past year, driven by a 7.4% surge in rents and a 4.9% increase in home building costs. The lack of available rental properties and ongoing worker shortages in the construction sector contributed to these increases.
Consumers were also hit with higher electricity prices, which rose 6.5% over the past 12 months. The ending of power bill rebates, which are set to be reinstated by state and federal governments from July 1, contributed to this increase. Furthermore, inflation for fruit and vegetables posted its biggest annual increase in a year, rising 4.4%.
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