Australian Inflation Remains High, Dampening Hopes for Early Interest Rate Cuts

The Australian Bureau of Statistics has released federal government revenue data for recent budget cycles, revealing that inflation in Australia has remained stubbornly high, with a 1% increase in the first three months of 2024, exceeding market expectations. The consumer price index (CPI) for the first three months of 2024 was 3.6% higher than a year earlier, slowing from the 4.1% annual pace in the December quarter, but higher than the expected 3.5% increase.

The higher-than-expected price rise in the March quarter has blindsided Treasurer Jim Chalmers' budget preparations and dampened expectations of early interest rate cuts. Economists warn that new government spending could further delay interest rate cuts, reinforcing the view that the Reserve Bank of Australia (RBA) is unlikely to cut rates before the fourth quarter. There is even a risk that the bank may need to hike rates further to address the high inflation levels in the country.

Why this matters: The persistently high inflation in Australia has significant implications for the economy and the lives of Australians. It affects the timing of potential interest rate cuts by the RBA, which in turn impacts borrowing costs, savings rates, and overall financial stability for households and businesses.

The main drivers of price rises since the start of the year were education, health, housing, and food and alcoholic beverages. While inflation is moderating in some categories, services inflation has accelerated, and non-tradeable inflation, including rents, education, and insurance, is still running too high, which will be a concern for the RBA. Electricity prices fell 1.7% in the March quarter, but without government rebates, the annual rise would have been 17%.

The RBA's board will analyze the latest data when it meets in May, and the federal budget to be released on May 14 will also be shaped by the inflation figures. The central bank is expected to keep biding its time and leave rates unchanged at its meeting in May, with the first rate cut now expected to occur after the November meeting rather than September as previously expected. As Sky News host Paul Murray noted, the data reinforces the challenge the RBA faces in bringing inflation back to target.

Key Takeaways

• Inflation in Australia remains high at 3.6% in Q1 2024, exceeding expectations.
• Higher-than-expected inflation dampens expectations of early interest rate cuts by RBA.
• Main drivers of price rises were education, health, housing, food, and alcoholic beverages.
• RBA expected to keep rates unchanged in May, with first rate cut now expected after November.
• Persistently high inflation poses challenges for the RBA in bringing it back to target.