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Will the latest inflation figures push up interest rates in June?

Peter Terlato avatar
Peter Terlato
- 4 min read
Will the latest inflation figures push up interest rates in June?

The latest monthly figures show the pace of inflation rose in April, following three consecutive months of decline. 

The Australian Bureau of Statistics (ABS) monthly Consumer Price Index (CPI) indicator rose 6.8% in the twelve months to April 2023. This represents a 0.5% month-on-month increase in annual inflation from March (6.3%).

Headline inflation had been on a downward trajectory since peaking in December 2022 (8.4%). The new monthly reporting series showed a weakening rate of annual inflation between January (7.4%) and February (6.8%) 2023.

However, these latest statistics reveal that, if not kept in check, inflation can rebound and drive prices higher.

The most significant contributors to April's inflation figures were increased costs in the areas of housing (+8.9%), food and non-alcoholic beverages (+7.9%), transport (+7.1%) and recreation and culture (+6.%).

Rents rose (+0.8%) from an annual increase of 5.3% in March to 6.1% in April, exacerbating an already tight market.

Volatile price movements may skew inflation data

In a media release ABS head of price statistics Michelle Marqardt pointed out that, at times, some goods may experience erratic price fluctuations as a result of supply issues, tax, legislative changes or other external factors.

"It’s important to note that a significant contributor to the increase in the annual movement in April was automotive fuel. The halving of the fuel excise tax in April 2022, which was fully unwound in October 2022, is impacting the annual movement for April 2023," she said.

“It can be helpful to exclude items with volatile price changes from the headline CPI to provide a view of underlying inflation. When excluding these volatile items, the annual movement of the monthly CPI indicator was 6.5 percent in April, lower than 6.9 percent recorded in March."

Volatile items removed from the series were auto fuel (see chart below), fruit and vegetables, and holiday travel. 

Automotive fuel, Australia April 2023

While the stats (see below) show inflation rising (+0.5%) month-on-month in April, the same figure - excluding volatile items and holiday travel - actually reports a fall (-0.4%) in the price index between March (6.9%) and April (6.5%).

CPI figures - April 2023

How will this affect interest rates?

Earlier this month, the Reserve Bank of Australia (RBA) increased the cash rate to 3.85%. In April, the central bank paused its nearly year-long stretch of rate hikes in order to provide additional time to assess the state of the economy.

In his latest statement on monetary policy, RBA governor Philip Lowe argued that although inflation had passed its peak, it was still too high, and it will be some time yet before it’s back within the target range of 2-3%.

Given that the latest CPI figures may suggest a return to rising prices, this information could influence the RBA to once again increase the cash rate in June, in an effort to ease inflationary pressures.

However, only one of Australia’s big four banks has pencilled in another rate hike this year. ANZ thinks the cash rate will reach 4.10% by August, while its competitors believe we’ve hit the peak and anticipate cuts as early as next year.

Ms Marqardt's suggestion that April's headline CPI figure was inflated (excuse the pun) by a handful of volatile price movements, causing an unexpected increase in annual inflation, may also impact the Board's decision next month.

What’s the outlook for 2023?

Most professional predictions anticipate a slowdown in Australia's economic growth, and concerns regarding inflation and declining housing investment are a consistent theme throughout most forward estimates. In addition, the Aussie dollar's value has taken a beating in recent months - particularly the AUD/USD forex pairing.

This currency disparity affects many aspects of our economy, including merchandise trade, capital flows, economic growth, right down to international holiday expenses. So, what's caused this sudden fluctuation in market value?

Homeowners are struggling to meet loan repayments; rents are skyrocketing and there's a lack of supplyinterest rates continue to be pushed higher; and the potential for a recession is growing.

For all these reasons, and more, Australia’s economic outlook for the remainder of 2023 remains uncertain. Still, economists have offered some optimistic notions and remain confident we'll outperform other advanced economies.

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Product database updated 19 May, 2024

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.