Australia’s Sticky Inflation Clouds RBA Outlook as Demand Slows

7m2{]7sv[heqwc}4m}45z0kc_media_dl_1.png Reserve Bank of Australia

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(Bloomberg) — Australia’s core inflation remained elevated in April just as signs emerge that rapid fire interest-rate hikes are beginning to weigh on economic activity, complicating the task of navigating a global energy shock.

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The closely-watched trimmed mean gauge of annual consumer-price growth, which shaves off volatile items, accelerated to 3.4%, in line with estimates. The RBA aims for inflation at the midpoint of its 2-3% target band.

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On a monthly basis, the underlying measure also quickened to 0.3% from March, matching forecasts. 

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The in-line result eased concerns the RBA will deliver a fourth rate rise next month. The Aussie dollar and government bond yields declined while swaps priced an even chance of the next hike in August, down from a 64% probability prior to Wednesday’s print.

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“For the RBA, June is now unquestionably off the table,” said Robert Thompson, Sydney-based head of economics and strategy at RBC Capital Markets, pushing back his call for the next hike to August. 

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“It’s a game of fine margins now though, with the board also likely to be increasingly attentive to growth/labor market risks as time wears on. They may try to ride out a further pickup/broadening out in inflation from here.”

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Thompson has warned the economy could slow more sharply — while inflation could also prove more persistent — than the RBA currently expects in its official forecasts, pointing to an “unwelcome stagflation mix.”

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High frequency indicators in recent week show the economy is beginning to sag under the strain of higher borrowing costs and an Iran war-driven surge in fuel prices. Unemployment climbed to a 4-1/2-year-high in April, while about one-third of firms reported a drop in revenue over the past four weeks and half saw a rise in operating expenses.

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What Bloomberg Economics Says…

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“Softening housing and labor market conditions, alongside subdued confidence, should keep the central bank sidelined for now — though it will likely retain hawkish guidance to keep inflation expectations anchored.”

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— James McIntyre, economist

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For the full note, click here

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The RBA’s policy board next meets on June 15-16 and is widely expected to keep the cash rate unchanged at 4.35% after hiking at each of its three previous meetings this year.

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Economists expect risks to the inflation outlook will remain tilted to the upside, led by new housing costs as higher diesel, freight and petrochemical prices feed through supply chains.

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“Automotive fuel prices are still 23.5% higher compared to February and before the impact of the Middle East conflict,” said Sue-Ellen Luke, ABS head of prices statistics.

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“The impact of higher oil prices has also been seen in products and services with high freight and logistics costs, such as parcel delivery and building materials,” she said. “This is reflected in price increases of 12.4% for postal services and 4.7% for new dwelling construction compared to 12 months ago.”