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Inflation numbers strengthen the case for RBA to hike rates

  • Monthly figures show inflation in Australia grew faster than expected, coming in at 4% over the year to May 2024, up from 3.6% in April
  • Analysts say the stronger-than-expected figures strengthen the chances that the RBA’s next interest rate move will be a hike, not a cut in the cash rate as had been widely expected
  • While there was some improvement in inflation once volatile items were stripped out of the figures, the Reserve Bank’s preferred inflation measure rose for the fourth straight month

The latest monthly inflation figures will come as grim news to Australians with a mortgage, with the chances growing of another increase in official interest rates, not a cut.

The Australian Bureau of Statistics (ABS) monthly Consumer Price Index (CPI) indicator rose 4.0% in the 12 months to May 2024—more than most forecasters had predicted—and leading financial markets to narrow the odds on another rate hike.


Australia’s cash rate is currently at 4.35%—the highest point in 12 years.


The major banks had predicted the RBA would start cutting the cash rate later this year or early in 2025, but it’s likely some may revisit those forecasts.


The details


ABS figures show the annual pace of inflation accelerated to a six-month high in May of 4%, while a key core measure rose for the fourth straight month.


Most forecasters were expecting headline inflation to tick up from the annual rate of 3.6% recorded in April, but only to about 3.8%.


According to the ABS, the most significant price rises in May were Housing (+5.2%), Food and non-alcoholic beverages (+3.3%), Transport (+4.9%) and Alcohol and tobacco (+6.7%).

The Housing category clearly shows the impact of higher rents on the inflation figures, with the ABS saying rents grew 7.4% over the past 12 months, “with strong demand for rental properties amid tight rental markets continuing to drive rental price rises.”


Inflation on new homes was up 4.9% across the year to May, and electricity was up 6.5%.


There were a few positive signs, however.


The Age and Sydney Morning Herald’s Economics correspondent Shane Wright pointed out that there was “no increase in services inflation in May,” while the cost of so-called “tradable goods” fell and gas prices were down 2.5%.


ABC Finance reporter Alicia Barry highlighted the measure known as “Headline ex-volatile items and holiday travel” falling from where it was last month at 4.1% down to 4%, while economist and former central banker Justin Fabo said that less weakness than expected “in the volatile holiday travel and accommodation category accounted for all of the upside surprise.”


However, the RBA’s preferred measure of inflation is the so-called “Trimmed mean”, and the graph above clearly shows that the indicator has been rising for the last four months—moving further and further away from the RBA’s inflation target band of 2-3%.


It’s now at an annualised 4.4%—up from 4.1% in April.


The RBA’s next move


The board of the Reserve Bank of Australia (RBA) has been clear that it is “resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”


It has set a deadline of the end of next year to return inflation to that band.


Unfortunately, the RBA really only has one tool in its locker to achieve that outcome, and that is the movement of official interest rates.


At a press conference after the RBA’s June board meeting and its decision to keep the cash rate on hold at 4.35%, Governor Michele Bullock revealed that the board talked about raising the cash rate but did not even discuss the option of an interest rate cut.


AMP Chief Economist Shane Oliver said that with the trimmed mean measure now at high risk of coming in above the RBA’s own quarterly forecasts, “the risk of another rate hike has now risen to around 40%.”

With many commentators highlighting the volatility of monthly inflation data, Shane Oliver said the RBA will be focused on the June quarter CPI data to be released on the 31st of July, just in time for its next monetary policy meeting on the 5th and 6th of August.


However, Judo Bank economic advisor Warren Hogan claimed that the “RBA can’t walk away from this CPI result” with “inflation picking up from above target.”


Mr Hogan said the cash rate should probably be lifted to “around 5%” to “restore price stability” and suggested there was a strong case that the RBA should hike the cash rate 40 basis points to 4.75% at its August meeting.


Referring to the Stage 3 tax cuts, which will see all 13.6 million Australian wage earners get more in their pockets from the 1st of July, plus other state and federal government measures, which will provide substantial energy bill relief, Mr Hogan was blunt.


“The 4.35% cash rate won’t get the job done on inflation,” he said, “And there is a $40+ billion fiscal bomb about to hit in a few days.”


The ANZ Bank—which recently pushed back its own forecast of interest rate cuts to early next year—was more cautious, and said a rate hike was still “not our base case,” although Senior Economist Catherine Birch acknowledged the monthly inflation data “may make the RBA a little nervous, as it increases the risk that Q2 CPI will overshoot the RBA’s forecasts.”


“If this occurred alongside upward revisions to the RBA’s expectations for activity and labour market data, the RBA could lift the cash rate,” she said.