Quick Bites | Disappointing Inflation data

Australia’s monthly Consumer Price Index (CPI) indicator rose 4.0% in the 12 months to May 2024, up from 3.6% in April, according to the latest data from the Australian Bureau of Statistics (ABS). This is a significant negative surprise with forecasted inflation for a rise of 3.8% and increases the risk (albeit still small) of a future rate rise if the increased inflationary pulse doesn’t reverse.

That said, the ABS head of price statistics said: “CPI inflation is often impacted by items with volatile price changes like Automotive fuel, Fruit and vegetables, and Holiday travel. It can be helpful to exclude these items from the headline CPI to provide a view of underlying inflation, which was 4.0% in May, down from 4.1% in April.” The annual trimmed mean inflation figure was 4.4% in May, up from 4.1% in April.

In reaction to the inflation news, the Australian dollar jumped, while shares and bonds fell. Money markets now imply a 25% chance the RBA will lift the cash rate to 4.6% by September, which is up from 13% before the data was released.

While this negative surprise will cause some angst at the RBA, we still expect the next move in rates will be down. Fundamental factors favouring no rate increase remain largely intact: annual GDP growth in Q1 was the weakest since the early-1990s (apart from the pandemic), the monthly data points to continued weakness in consumption in Q2, and households remain under severe pressure from high mortgage rates and living expenses. It is hard to imagine that a rate increase would really help, whereas although inflation has delivered a nasty shock, the medium-term trend remains for it to continue to decline.

Source: ABS