A higher-than-expected inflation number has dramatically raised the risk the Reserve Bank will be forced to hike interest rates again to get consumer prices under control.
The Australian Bureau of Statistics measure of consumer prices for May showed a rise in annual headline inflation from 3.6 back to 4 per cent.
The Reserve Bank targets an inflation rate of 2–3 per cent, aiming for the mid-point of that range.
Asia-Pacific economist for Indeed Callam Pickering said the data would “give the RBA a lot to think about at their next meeting”, which will take place in early August.
“The latest monthly inflation figures represent a nasty upside surprise for the RBA,” he noted.
“There is now a distinct possibility that both headline and underlying inflation measures will sit well above the RBA’s expectations by midyear.
“With inflation already at levels that are uncomfortably high, we believe that Australian households and businesses need to prepare themselves for another rate hike.”
Betashares chief economist David Bassanese agreed, and said the result “can only be described as a shocker”.
“The upshot of today’s result is that it places enormous pressure on the Reserve Bank to not only not cut interest rates anytime soon, but potentially lift them further,” he wrote.
“It is still not a done deal that the RBA will raise rates in August.
“What will be critical is the June quarter CPI report on 31 July. If that confirms the still bubbling inflationary pressure evident in the monthly CPI reports over recent months, the RBA will have no choice but to act.”
Volatile prices and base effects boost inflation
While headline inflation unexpectedly jumped, the ABS measure of inflation excluding volatile price changes eased slightly from 4.1 to 4 per cent.
“We should always be careful placing too much importance on the monthly inflation figures,” explained Mr Pickering.
“The headline figure isn’t terribly informative but we can derive value from underlying measures, such as the monthly CPI excluding volatile items and travel.
“That measure has been stable over the past six months and that’s obviously a concern for a central bank that is rapidly losing patience.
“That’s due in large part to the stickiness of service sector inflation, which simply isn’t coming down as quickly as the RBA or the market expected.”
The main contributors to the price increase over the year to May were housing (+5.2 per cent), food and non-alcoholic beverages (+3.3 per cent), transport (+4.9 per cent), plus alcohol and tobacco (+6.7 per cent).
Notably, rents were up 7.4 per cent over the year to May, while fruit and vegetable prices also jumped 4.4 per cent over that period.
However, it appears much of the May jump was due to base effects — that is, prices were up on an annual basis, not because they rose particularly strongly during May.
For example, automotive fuel prices dropped 5.1 per cent in the month of May, the first monthly fall since January, but were still up 9.3 per cent over the year to May, steeper than the 7.4 per cent annual rise recorded in April.
Likewise, despite falling 2.7 per cent in May, holiday travel and accommodation prices rose 2.9 per cent over the year to May, following a 6.2 per cent annual fall to April.
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