Core inflation above expectations, but July rate cut still on the table
Trimmed mean inflation was slightly above the Reserve Bank’s expectations in April, ABS data showed, but economists predict this won’t get in the way of further rate cuts.
Core inflation rose by 2.8 per cent in the 12 months to April, overshooting the RBA’s 2.6 per cent forecasts but remaining relatively stable in month-on-month terms.
CreditWatch chief economist Ivan Colhoun said that the April inflation print was unlikely to prevent additional monetary easing from the RBA, although it did slightly lower the chance of back-to-back interest rate cuts.
“Despite the inflation surprise, the RBA’s forecasts were based on expectations of two more rate cuts, so further easing is still likely - though back-to-back cuts are now less probable due to inflation and global trade uncertainty,” Colhoun said.
Given the current data, he predicted that inflation may level off at 2.75 per cent - within the RBA’s 2-3 per cent target range but above their 2.6 per cent forecast.
Headline inflation was 2.4 per cent in the 12 months to April, largely driven by food and non-alcoholic beverages (3.1 per cent), housing (2.2 per cent) and recreation (3.6 per cent), ABS data showed.
Egg prices saw steep annual growth of 18.6 per cent as supplies were hampered by bird flu outbreaks.
AMP economist My Bui said that services inflation continued to be a large driver of inflation pressures. Service items rose by 4.1 per cent over the year, as opposed to a 0.9 per cent rise in goods prices.
Bui added that the momentum in housing price growth had been encouraging over the past few months, with annual rent growth sitting at 5 per cent per year - the slowest growth in over two years.
While price increases have cooled in recent months, business costs remain elevated in comparison to pre-pandemic levels, Colhoun said.
Cost pressures have driven high insolvency rates as operational expenses remain roughly 20 per cent higher than pre-pandemic levels.
“Just because inflation is expected to remain at the RBA’s target, this does not mean that prices have fallen, just that prices are now rising more slowly than before,” Colhoun said.
“The cost of living and the cost of doing business remains much higher (over 20% higher) than immediately before COVID. That’s been a significant source of pressure for consumers and businesses alike in this cycle.”
