Weekend Gold Coast Bulletin - Property
Inflation spike sparks rate jitters
Persistent inflation will give the Reserve Bank plenty to think about at its next meeting, with the latest data suggesting a rate hike in August could be on the cards.
The latest monthly inflation data from the Australian Bureau of Statistics shows annual inflation rose 4 per cent over the 12 months to May – up from 3.6 per cent in April.
It’s the highest monthly inflation result in six months and has increased the likelihood of another interest rate rise as early as the central bank’s next meeting.
The spike in inflation was driven by price increases for housing, food and beverages, transport, alcohol and tobacco. However, when “volatile” items were removed, the result was a little lower than April.
ABS head of price statistics Michelle Marquardt said price changes for volatile items – such as fuel, fruit and vegetables and holiday travel – could affect the CPI result.
“It can be helpful to exclude these items from the headline CPI to provide a view of underlying inflation, which was 4 per cent in May – down from 4.1 per cent in April,” she said.
PropTrack senior economist Paul Ryan said the higher-than-expected result suggested inflation was proving tricky to rein in.
“The monthly indicator, while preliminary, is suggesting that inflation is still a bit more persistent than people were expecting,” he said.
“If that persistence is maintained in the quarterly indicator before the RBA’s meeting in early August, there’s a heightened likelihood of a rate hike.
“The RBA clearly hasn’t ruled anything out, and if inflation continues to supply to the upside, they will hike rates.”
In a statement following the decision last month to leave rates on hold, the RBA board said the pace of the decline in inflation had slowed, remaining above the midpoint of its target 2-3 per cent range. The board said data indicated there was still excess demand in the economy, but households were showing restraint with discretionary spending.
Mr Ryan said while financial market pricing indicated the likelihood of a rate hike in August had increased, the RBA would likely prefer to hold rates steady despite the higher-thanexpected inflation result as it would send a mixed signal if the subsequent action was a cut.
“We know at the last meeting that the RBA only considered a hike and a pause, so it’s likely that’s what they’ll be continuing to consider in the August meeting,” he said. “Market expectations for a hike have increased but at this stage it’s probably still likely that it will be a hold.”
The cash rate target has been increased 13 times since the first hike in May 2022, reaching a 12-year high of 4.35 per cent in November.
Rates have been on hold since then, but RBA governor Michele Bullock has consistently reiterated that the board would not rule anything in or out when it came to interest rates and would act based on the latest data.
Mr Ryan said all eyes would be on the next round of quarterly inflation data, which would be released on July 31 – a little less than a week before the RBA’s next rate decision on August 6.