AUSTRALIA’S inflation accelerated faster than expected in May, sending the currency higher as traders boosted bets the Reserve Bank of Australia (RBA) will resume raising interest rates at its next meeting.
The monthly consumer price indicator (CPI) climbed 4 per cent from a year earlier, exceeding economists’ estimate of 3.8 per cent, data from the Australian Bureau of Statistics (ABS) showed on Wednesday (Jun 26). The trimmed mean core measure, which smooths out volatile items, advanced 4.4 per cent versus 4.1 per cent a month earlier.
The CPI report showed:
The most significant contributors were housing, food – led by takeaway meals – and transport.
Rents increased 7.4 per cent for the year, reflecting a tight rental market across the country, the ABS said.
Energy Bill Relief Fund rebates from July 2023 mostly offset electricity price rises, the bureau said. Excluding the rebates, prices would have risen 14.5 per cent in the 12 months to May 2024.
The Australian dollar rose 0.3 per cent after the print as traders priced a greater chance of a rate hike at the RBA’s Aug 5 to 6 meeting. Yields on policy sensitive three-year bonds also gained.
Wednesday’s results come after RBA governor Michele Bullock restated last week that the rate-setting board is not ruling out a rate hike after leaving the benchmark at a 12-year high of 4.35 per cent. She added that policymakers remain vigilant to upside risks for inflation.
In the US, Federal Reserve officials have said that while they are encouraged by an improvement in price data, they will need to see months of such progress before reducing rates. A healthy job market is providing them with some flexibility.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
That’s also true in Australia, where the jobless rate is hovering around levels that are below estimated full employment. The RBA’s goal is to bring consumer prices back within its 2 to 3 per cent target while holding onto the significant job gains made since the pandemic.
The RBA has held rates since a surprise tightening in November while highlighting that aggregate demand still exceeds the economy’s supply capacity. Australia’s 13 hikes between May 2022 and November 2023 are at the lower end of the global tightening scale.
Treasurer Jim Chalmers tried to play down the implications of the spike in prices. “We’ve seen around the world that inflation can zig and zag on its way down, it doesn’t always moderate in a straight line and the last mile can be a bit harder,” he said.
Bloomberg economist James McIntyre said: “Our bet is that the RBA will opt to hold. For one, the next inflation readings should be a little cooler. What will tip the balance will be the RBA’s judgment on inflation expectations and forecasts for where inflation will be in 18-24 months – we think the central bank will likely stay in a high-for-longer holding pattern.”
Bullock has expressed a willingness to be patient as she seeks to slow inflation without choking off economic growth. The bank’s forecasts show that the Consumer Price Index (CPI) will only return to target in 2025.
Callam Pickering, economist at global job site Indeed who previously worked at the central bank, said: “While we maintain that the current macroeconomic settings will eventually be sufficient to contain inflation, there will be significant pressure on the RBA to act to avoid the perception that it isn’t fully committed to beating inflation.” BLOOMBERG
