Australian inflation hits 20-year high, May rate hike hangs in the balance

By Wayne Cole

SYDNEY (Reuters) – Australian consumer prices jumped at the fastest annual rate in two decades in the last quarter as the costs of petrol, home building and food all soared, fueling speculation that interest rates could drop from record highs as early as next week.

That would be bad news for Prime Minister Scott Morrison as he battles a tough election where the rising cost of living has become a sore point for voters.

The data reinforced a growing view that the Reserve Bank of Australia (RBA) no longer needs to keep interest rates at emergency levels of 0.1% and should tighten soon, perhaps even at its next political meeting on May 3 rather than in June.

“Rising non-traded goods inflation indicates that this is partly due to wage dynamics, not just disruptions in the global economy,” economists at ANZ Bank said in a report.

“We now expect the RBA to rise 15 basis points next week. Inflationary pressures have intensified and widened. A cash rate target of 0.1% is inappropriate in this environment. .”

Markets were also quick to cut the odds of a 0.25% hike next week, although many still favor a June hike given that such a sudden move would cause political ripples so close to the June 21 election. may.

Futures contracts also changed in price at rates of 0.5% in June, either in one or two increases.

The Australian dollar hit a two-month low of $0.7190 but was still down on the week as investors had already priced in rate hikes and were more concerned about Chinese shutdowns and falling stock markets.

“We now expect the RBA to initially rise 40 basis points to 0.5% in June,” said Andrew Boak, an economist at GS Macro, who forecasts a series of quarter-point moves to a higher. eventual peak of 2.5%.

“The combination of above-target inflation, an initially resilient economy and a more hawkish reaction function skews risks towards a steeper, higher path for rates.”

PAINFUL READING

Wednesday’s data made for painful reading as the consumer price index (CPI) jumped 2.1% in the first quarter, beating market forecasts of a 1.7% increase.

The annual pace accelerated to 5.1%, from 3.5% the previous quarter and the highest since 2001.

A closely watched measure of core inflation, the trimmed average, hit a record 1.4% in the quarter, bringing the annual pace to its highest since the start of 2009 at 3.7%.

It was the first time since 2010 that core inflation rose above the Reserve Bank of Australia’s (RBA) target range of 2-3%, a dramatic reversal from the past few years when it was constantly undervalued.

“This reflects the widespread nature of the price increases as the effects of supply disruptions, rising shipping costs and other global and domestic inflationary factors rippled through the economy,” Michelle said. Marquardt, head of price statistics at the Australian Bureau of Statistics. .

Gasoline led the price charge with a 35% gain for the year, while the cost of new homes climbed a record 13.7%. Food prices also recovered in the first quarter due to high transport, fertilizer, packaging and ingredient costs.

Commonwealth Bank of Australia economists said inflation data meant the RBA should start raising rates, but they were not changing their call that the first move would be in June – after the next round of data on wages – due to guidance in central bank minutes. of its political meeting in April.

“If the RBA lifts the cash rate at the May board meeting next week, it will have gone back on what it said last week – that the board agreed that it would take into account evidence of both inflation and labor cost developments as it sets policy,” they said in a report.

(Reporting by Wayne Cole, additional reporting by John Mair; Editing by Jacqueline Wong and Sam Holmes)

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