Inflation shock puts end to hopes of interest rate cut

Inflation to May 2024 has taken a stunning turn, rising sharply and effectively quashing any hopes of an interest rate cut this year.

Inflation wrecking ball shatters Australian flag
The inflation rebound few people saw coming has raised the prospect of another interest rate hike. (Image source:

A shock rise in inflation for the year to May has extinguished any hope of an interest rate cut any time soon.

The monthly Consumer Price Index (CPI) indicator rose 4.0 per cent, up from 3.6 per cent in April, according to the latest data from the Australian Bureau of Statistics (ABS).

The figure is likely to send shockwaves through the corridors of the Reserve Bank of Australia’s Chifley Square offices in Sydney.

Michelle Marquardt, ABS head of prices statistics, offered some hope that the numbers were not as bad as they appear, although the RBA may see it differently.

“CPI inflation is often impacted by items with volatile price changes like automotive fuel, fruit and vegetables, and holiday travel. 

“It can be helpful to exclude these items from the headline CPI to provide a view of underlying inflation, which was 4.0 per cent in May, down from 4.1 per cent in April.”

Wednesday’s Consumer Price Index (CPI) puts inflation well off the trajectory needed to return to the RBA’s target band of 2-3 per cent by the end of 2025.

Inflation has now risen from the 3.4 per cent recorded in December 2023 and January and February 2024, and if it carries through to the June quarter result to be released just before the August Reserve Bank Board meeting, it will put a cash rate increase well and truly on the agenda.

Canstar’s Group Executive, Financial Services, Steve Mickenbecker, said an interest rate rise was now possible, and perhaps soon.

“This increase in the CPI Indicator for May makes it the third on a trot, lifting from 3.4 percent in February to a staggering 4.0 percent for May, confirming that inflation is off the trajectory towards the 2 to 3 percent target band the RBA seeks.

“The increase in the CPI Indicator will have the Reserve Bank moving towards the starting blocks and readying to fire the interest rate increase gun, just as the men line up for the 100 metre final in Paris, presuming that June quarter inflation reflects the same trend.

“The CPI rose 1.0 percent in the March 2024 quarter from 0.6 percent in the December 2023 quarter and a further rise, or even a failure to fall, in the June quarter will test the Reserve Bank’s patience.

“With scant evidence that inflation is moving towards the target band, the Reserve Bank will feel uncomfortable waiting a further three months for the following release of quarterly CPI and will surely lift rates in August - the risk of baked-in inflationary expectations is too high,” Mr Mickenbecker said.

Renters, borrowers left to tackle inflation

It was a worrisome outlook for borrowers.

An increase of 0.25 percent would add another $100 to the monthly repayment on a $600,000 loan over 30 years.

Cruelly, the very people hardest hit by inflation will be the ones to pay the price if, as seems increasingly likely, the next interest rate move is upwards.

The most significant contributors to the annual rise to May was housing (5.2 per cent), up from 4.9 per cent in April. Rents increased 7.4 per cent for the year, reflecting a tight rental market across the country.

Increased loan repayments will hit borrowers, with rents also subsequently rising as landlords look to pass on at least some of their own elevated expenses.

Around a third of Australian households either rent (31.4 per cent) or were homeowners with mortgages (36.8 per cent). It is this cohort that will carry the load when it comes to tackling rising inflation.

The stage three tax cuts that will kick in on 1 July are now being seen through a different lens too.

On the one hand, hopes they would help offset the rising cost of living are now being replaced by concerns they will only go towards higher mortgages and rents.

Just as disconcertingly, the tax cuts could have a further corrosive impact on inflation, ultimately delivering more pain than comfort.

The RBA does not meet until 6 August, giving it time to contemplate its next move with newer inflation data. On 18 June it kept interest rates on hold at 4.35 per cent.

Real Estate Institute of Australia President, Leanne Pilkington, said economic sluggishness should encourage the RBA to hold fire on interest rate increases.

“This stickiness in the final hurdle to beat inflation is the same as other countries are experiencing in getting inflation into the target range of their central banks.

“The CPI figures need to be taken against the background of an economy that is barely growing.

“While headline unemployment declined slightly in May, the trend unemployment rate rose a little from 3.9 per cent to 4 per cent, to its highest level since Covid lockdowns.

“GDP growth in the March quarter it was 0.1 per cent and 1.1 per cent for the year and trending down - on a per capita basis we have had four consecutive quarters of negative growth.

“The current uptick in inflation should not in itself flag an increase in interest rates but a delay in any drop,” Ms Pilkington said.

Building industry still struggling

The annual rise in new dwelling prices remained steady at 4.9 per cent, with builders passing on higher costs for labour and materials. 

The ABS also released the March quarter engineering construction data on Wednesday (26 June) showing its first decline in two years.

The volume of engineering construction dropped by 2.3 per cent during the March 2024 quarter.

The reduction affected both public sector and private sector projects.

There was a 2.4 per cent fall in engineering construction work done for the public sector while the volume of private sector activity fell back by 2.2 per cent.

The reverse in engineering construction activity is ominous given that it was previously the main source of growth in the industry.

All three pillars of construction activity are now moving backwards.

Master Builders Australia CEO, Denita Wawn, said inflation was hurting construction too, and curtailing hopes of resolving the housing crisis.

“Inflation is a capacity killer, making investment more expensive and less attractive.

“On the ground, we continue to hear projects for new homes, commercial or infrastructure construction simply don’t stack up because it takes too long to build and is too costly.

“If we don’t get inflation under control and urgently start boosting housing supply we are in for a lengthy period of pain and depressed construction activity.

“We know governments have acknowledged that more reform is needed to reduce building costs but the rubber needs to hit the road.

“Bringing down housing and rental inflation can only be achieved once we get a move on and speed up planning reforms, address tradie shortages through domestic and skills migration pathways, reform the regulatory environment, and scrap damaging elements of recent IR changes,” Ms Wawn said.

The annual rise in new dwelling prices remained steady at 4.9 per cent, with builders passing on higher costs for labour and materials.

Article Q&A

What is the inflation rate in Australia?

The Australian Bureau of Statistics (ABS) has released the CPI Indicator for May 2024 showing an annual increase of 4.0 per cent. It has risen from the 3.4 per cent recorded in December 2023.

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