Quick Bites | Australian inflation comes in higher than expected

The most recent CPI report was disappointing. Instead of declining from 3.5% year on year to 3.4% as the market expected, the figure revealed an increase to 3.6%. This is not what the market, the government, or the Reserve Bank of Australia (RBA) wanted.  

Prices rose by more than expected last month as consumers were hit with the biggest increase in health insurance premiums in several years, and bad weather caused fruit and vegetable costs to rise.  

The RBA has kept the cash rate on hold since November 2023 with inflation still above its 2-3% target. Economists will be looking at the services component of this month’s data which has proven resilient to higher rates.  

Traders globally continue to push out rate cut expectations as data continues to show resilience in labour markets and the economy. The prevailing market narrative is all about “higher for longer”. Unlike the rest of the world, money markets in Australia are unsure whether the next rate move is up or down, although I place a very low risk on a rate increase – the economy is simply not strong enough to withstand that. (Markets imply a 16% chance the RBA will lift the cash rate to 4.6% by September but are fully priced for a rate cut in August 2025.)

Source: Australian Financial Review

On the back of the news, the Australian dollar gained slightly and share losses deepened. Bond yields rose with the three-year rate up 2 basis points (bps) to 4.07% and the 10-year up 4 bps to 4.39%.