Australia's Rising Inflation Could Prompt RBA to Postpone Rate Cuts

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Australian consumer price inflation unexpectedly hit a five-month high in April, driven partly by higher spending on petrol, healthcare, and leisure.

This strengthened expectations that interest rates will remain unchanged in the near future. The Australian Bureau of Statistics reported that the annual consumer price index (CPI) rose 3.6% in April, up from 3.5% in March, surpassing market forecasts of 3.4%.

Core inflation, measured by the trimmed average, also increased to 4.1% year-over-year from 4.0%. The CPI excluding volatile items and holiday costs remained steady at 4.1%.

The chance of a quarter-point rate hike in September has increased to 20% from 12%, while the possibility of a rate cut has been pushed back to August or September next year, about 15 months from now. Economists expect the RBA to begin its rate easing cycle in the fourth quarter.

The April report is heavily skewed toward goods in the first month of the quarter and does not account for changes in prices for services, which are usually stable.

Analysts say the bar for rate hikes remains high. The Reserve Bank of Australia is avoiding "over-tweaking" policy, although risks to inflation have increased following a strong first-quarter CPI report.

The RBA forecast headline inflation to rise to 3.8% by June but expects government measures such as energy rebates and rent subsidies to help ease cost of living pressures in the second half of the year. However, additional government stimulus could lead to higher costs and inflation.

In April, the CPI rose 0.7% from March, aided by a 4% increase in clothing and footwear prices and a 2% increase in healthcare costs. Holiday travel and accommodation prices rose 4.6% due to strong demand for international travel over the Easter and school holidays.

The RBA raised interest rates by 425 basis points from May 2022 to a 12-year high of 4.35% but left them unchanged for four straight meetings since November as consumers cut spending and the economy slowed. However, it does not rule out possible policy changes.