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Australia’s inflation rate jumps to 4%, putting an RBA rate rise back on the agenda

  • Written by Isaac Gross, Lecturer in Economics, Monash University

A key measure of inflation has jumped, climbing to 4% in May after edging up from a recent low of 3.4% in February.

The Bureau of Statistics monthly consumer price indicator[1] produced an annual inflation rate of 3.6% in April. This was the same as the longer-established Bureau of Statistics quarterly measure, which produced 3.6% in March.

The upward turn suggests the Reserve Bank will have to revisit the case for an interest rate hike when it meets next in early August.

At that meeting, it will also have before it the monthly and the quarterly figures for June, which will be released in late July.

The most significant contributors to the annual increase were housing, food and non-alcoholic beverages, transport, and alcohol and tobacco.

These are the industries that have been grappling with elevated costs, reflecting broader global supply chain disruptions and domestic market dynamics, especially those related to housing.

The Reserve Bank has kept its cash rate on hold since November despite inflation remaining a good deal above its 2–3% target band.

Adding to pressure on the board to increase rates once again will be Australia’s resilient labour market, which continues to record historically low unemployment.

The answer is no, and yes. While the annual headline inflation rate did jump to 4%, part of the jump was due to what economists call “base effects”.

Jim Chalmers: inflation edged down. Dean Lewins/AAP

When today’s figures for May 2024 arrived, the figure for May 2023 dropped out of the annual calculation. That figure was particularly low (prices fell by 0.42% that month), making an increase in the measured annual rate published today all but inevitable.

Treasurer Jim Chalmers noted today that the monthly index actually “edged down” in May, falling 0.1%.

But to get an accurate read, it is best to focus on an “underlying” measure that tries to adjust for noisy month-to-month jumps.

Andrew Lilley, an economist at Barrenjoey, believes the best underlying measure is one that adjusts for seasonal differences and excludes the price of travel and some other volatile purchases.

This underlying rate of inflation has remained consistently above 4% over the past year, well above the Reserve Bank’s inflation target.

But, ultimately, the most important word in the bureau’s description of its monthly consumer price index indicator is “indicator”.

The monthly indicator isn’t an official figure in the same way as the quarterly consumer price index, which is used in contracts and displayed in big print at the top of the Reserve Bank’s website.

The monthly indicator measures only about 70% of the prices used to produce the quarterly index.

It is the official quarterly index that will guide the Reserve Bank in its decision about whether or not to increase interest rates.

It’ll get it in the last week of July.

References

  1. ^ monthly consumer price indicator (www.abs.gov.au)

Authors: Isaac Gross, Lecturer in Economics, Monash University

Read more https://theconversation.com/australias-inflation-rate-jumps-to-4-putting-an-rba-rate-rise-back-on-the-agenda-233331

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