Latest inflation jump is bad news for borrowers

Everything you need to know about interest rate decisions

Source: TND

The consumer price index has risen for the second consecutive month, as Australians are slugged with higher prices for essentials such as food and health care.

The inflation jump in April is expected to further push back the chance of cuts to official interest rates, in more bad news for mortgage holders.

Official data from the Australian Bureau of Statistics on Wednesday showed inflation ticked up to 3.6 per cent in the 12 months to April, from 3.5 per cent in March.

Moody’s Analytics economist Harry Murphy Cruise described it as “not yet a trend, but a worrying development nonetheless”.

“The outlook for Aussie inflation has gotten a little murkier of late. With inflation digging in its heels, the government is ramping up spending to bring it down faster. Confused? You’re not alone,” he said.

The latest data shows inflation is edging further away from the Reserve Bank’s target range of 2 to 3 per cent.

However, the monthly index is more volatile and less comprehensive than the quarterly version.

That updated data, on which the RBA will place more emphasis, will be released in late July.

But Wednesday’s monthly data was higher than the 3.4 per cent pencilled in by economists, adding to the case for a delay in any interest rate cuts.

It also had fruit and vegetables showing their largest rise in a year as bad weather battered crops.

Health costs also accelerated, lifting 6.1 per cent in the 12 months to April from 4.1 per cent in the year to March. That largely reflected the April 1 rise in health insurance premiums.

Rents are still rising strongly as vacancy rates remain low.

The pace of growth has moderated a little, to 7.5 per cent in the 12 months to April, down from 7.7 per cent in March.

Betashares chief economist David Bassanese said the higher-than-expected monthly inflation outcome was disappointing against the backdrop of still quite weak consumer spending.

Bassanese said the disinflationary process in Australia appeared to have stalled this year after encouraging declines over 2023.

“With consumer spending already weak, lingering inflationary pressures in Australia appear to largely reflect cost-push factors in areas such as housing, insurance, and energy, which interest rates can’t really contain,” he wrote in a note.

The RBA might be concerned about inflation staying uncomfortably high, the economist said, which could risk the inflation expectations becoming entrenched.

“Indeed, although consumer spending by domestic residents is weak, the RBA has noted the overall economy is still operating at a high level of capacity – due to the surge in immigration and the public infrastructure investment boom,” he said.

Murphy Cruise also said capping expectations of higher prices was crucial.

“When firms expect prices to rise quickly, it can prompt pre-emptive price increases,” he said.

He said the Albanese government hoped its $300 energy rebate would lower inflation by temporarily reducing the price of energy (a key item in the CPI basket).

“The big question is what it does to underlying inflation – the Reserve Bank of Australia’s preferred measure of inflation that strips out volatile items, often food and energy. These impacts are much less clear,” he said.

“It will all depend on how much of the energy rebates get spent, and how much gets squirrelled away into savings.”

He said the rebate will also come at the same time as similar payments from state governments – and the federal government’s reworked stage-three tax cuts, which will hand the average worker a tax cut of $1500 from July 1.

“All that will ensure the RBA stays put for a little longer; its next move will be down, but we’ll have to wait a little longer,” Murphy Cruise said.

“The board will be cautious not to pull the rate-cut trigger too early when there’s big amounts of dollars about to hit bank accounts. We see rates staying where they are until December.”

The RBA board will meet for its next official interest rate decision on June 17-18.


Topics: Inflation
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