Australia’s inflation accelerated faster than expected in April, snapping three months of easing and sending government bond yields higher as traders fretted about potentially another interest-rate increase next week.
(Bloomberg) — Australia’s inflation accelerated faster than expected in April, snapping three months of easing and sending government bond yields higher as traders fretted about potentially another interest-rate increase next week.
The consumer price indicator advanced 6.8% from a year earlier, up from 6.3% in March and exceeding a forecast 6.4% gain, official data showed Wednesday. The figures came shortly after Reserve Bank Governor Philip Lowe left the door ajar for further rate hikes, reiterating his long-held resolve to bring inflation back to the 2-3% target.
RBA Is in ‘Data-Dependent Mode’ on Interest Rates, Governor Says
The result casts some doubt over widespread expectations that the RBA would pause at Tuesday’s meeting, sending the rate sensitive three-year government bond yield as high as 3.43%. Overnight-indexed swaps are now almost fully pricing in a 25 basis-point hike by August, from 21 basis point before the data, while stocks extended declines.
“Another month of strong inflation figures creates a strong argument in favor of another cash rate hike,” said Callam Pickering, APAC economist at global job site Indeed Inc. “Persistently high inflation is simply too dangerous for jobs and income and the overall Australian economy.”
Wednesday’s report complicates the task for Lowe, who describes the RBA as being in “data-dependent mode” following 11 rate hikes since May 2022 that have taken policy to a level he views as “restrictive.”
The RBA has raised rates by 3.75 percentage points over the past year to take the cash rate to an 11-year-high of 3.85%. That has driven a slowdown in consumer spending and employment growth, while business surveys are pointing to weaker conditions.
Ahead of first-quarter gross domestic product data on June 7, some economists are forecasting a negative number. Still, Lowe insisted today that the RBA remains on its “narrow path” of bringing inflation back to target while delivering a soft landing for the economy.
Wednesday’s inflation report was impacted by the end of a temporary government fuel subsidy, said Michelle Marquardt, ABS head of prices statistics. Other significant contributors were housing, up 8.9%, food and non-alcoholic beverages, rising 7.9%, and transport, gaining 7.1%.
After excluding volatile items such as fruit, vegetables, fuel and holiday travel, underlying price growth was 6.5% in April, easing from 6.9% in March.
What Bloomberg Economics Says…
“The surprisingly steep rise in April’s inflation rate was driven by fuel-price distortions that masked cooling consumer price pressures more broadly. Lingering inflationary pressure in rents and electricity prices are a concern. But we think the RBA will place more weight on recent evidence the economy is sagging under the weight of 375 basis points of rate hikes since May 2022”
— James McIntyre, Economist.
To read the full note, click here
Policy makers and economists have urged caution in reading too much into the monthly inflation figures as not all items in the CPI basket are updated, meaning it has some deficiencies relative to the longstanding quarterly gauge.
Another reason for caution is that the drivers of inflation have shifted, with price pressures switching to services, from goods, driven by an acceleration in rents and utility prices.
Prior to the data release, Governor Lowe said one of the reasons for his policy tightening bias was to reinforce the idea that “we’ll do what’s necessary to get inflation to come down.”
“We really want people to understand that we are serious about this, that we’ll do what’s necessary, not to question our commitment to getting inflation back down,” Lowe told senators at Parliament House in Canberra. “As painful as that is we’ve got work to do there.”
–With assistance from Matthew Burgess and Georgina McKay.
(Adds economists’ comments, chart, details)
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