(Bloomberg) — Australia’s inflation came in faster than expected in the first three months of 2024, suggesting price pressures are proving sticky and bolstering the case for the Reserve Bank to hold interest rates at a 12-year high.
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The consumer price index advanced 3.6% from a year earlier, coming in above economists’ estimate of 3.5%, government data showed Wednesday. A closely watched core inflation gauge — the trimmed mean — rose 4%, also exceeding forecasts and well above the RBA’s 2-3% target.
Money markets wound back pricing for RBA easing this year, with the yield on policy sensitive three-year government bonds up 14 basis points to 3.99%. Swaps traders are now pricing a one-in-four chance of a rate cut in December from about a two-in-three chance prior to the report.
The Aussie dollar climbed 0.5% to 65.23 US cents after the release.
Wednesday’s data comes on the heels of employment figures that showed the labor market remains tight. Both will feed into the RBA staff’s updated forecasts that will be released simultaneously with the board’s policy decision on May 7.
Su-Lin Ong, chief economist at Royal Bank of Canada, viewed the report as strong “across the board,” including the core measures.
“Base effect drops out from here and will make further moderation in inflation challenging,” she said. “We could well see upward revision to the RBA’s near-term inflation forecasts and downward revision to its unemployment rate forecasts at the upcoming May Statement on Monetary Policy.”
Policymakers have expressed concern about the stickiness of services prices in Australia and the potential for inflation expectations to become unmoored the longer CPI remains elevated. Wednesday’s figures followed US data this month showing stronger price pressures and spurring concerns that inflation is becoming entrenched.
Australia’s 4.25 percentage points of rate increases between May 2022 and November 2023 are at the lower end of the global tightening scale, with RBA Governor Michele Bullock seeking to slow inflation without choking off economic growth. The CPI report suggests policymakers may have more work to do to cool prices.
Bullock has expressed a willingness to be patient on inflation with the RBA’s forecasts showing CPI will only return to target in 2025.
The CPI report also showed:
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On a quarterly basis, the most significant contributors were education, up 5.9%, health, 2.8% higher and housing up 0.7%
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Rents continued to increase at the fastest rate in 15 years
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Meat and seafood prices fell this quarter as increased supply and discounting led to price drops for beef, veal and lamb
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Annual non-tradables prices, which includes goods and services that are mostly influenced by domestic factors, eased to 5% from 5.4%
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Annual tradables were significantly lower at 0.9%, compared with 1.5% in the fourth quarter of last year. Deflation there has been seen in imported goods including footwear, clothing accessories, furniture and household appliances
–With assistance from Matthew Burgess and Garfield Reynolds.
(Adds comment from economist, updates markets.)
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