Inflation just spiked. This is what it means for interest rates
The latest monthly inflation data from the Australian Bureau of Statistics, released today, showed annual inflation rose 4% over the 12 months to May, up from 3.6% 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 RBA’s next meeting in August.
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.
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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 4.0 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.”
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RBA governor Michele Bullock has reiterated that the board isn't ruling anything in or out when it comes to interest rates. Picture: NewsWire
In a statement following the decision to leave rates on hold last week, the RBA board said the pace of the decline in inflation has slowed, with inflation remaining above the midpoint of its target 2-3% range.
The board said data indicated there was still excess demand in the economy, but households were restraining 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-than-expected inflation result, as it would send a mixed signal if the following movement 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% in November.
Rates have been on hold since then, but RBA governor Michele Bullock has consistently reiterated that the board isn’t ruling anything in or out when it comes to interest rates, and will act based on the latest data.
Most economists expect the RBA's next move will be a cut, although the big banks are split on whether rates will start coming down this year or next.
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The RBA board kept the cash rate on hold at 4.35% at its most recent meeting, but expectations of a hike in August have increased. Picture: Getty
ANZ senior economist Catherine Birch said the higher-than-expected inflation result in May would make the RBA a little nervous, as it increased the risk that the quarterly inflation result would 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, although a rate hike is not our base case," she said.
Mr Ryan said all eyes would be on the next round of quarterly inflation data, which will be released on July 31, a little less than a week before the RBA’s next rate decision on August 6.