Fresh ABS monthly consumer price index (CPI) soared 4.0% in the 12 months to May, surging from the previous month’s 3.6% and well above market expectations of a 3.8% rise. 

Driving the annual rise in inflation were housing (up 5.2%), food and non-alcoholic beverages (up 3.3%), transport (up 4.9%), and alcohol and tobacco (up 6.7%). 

Goods inflation was flat at 3.3% year-on-year, while services was up 0.8 percentage points from the month prior at 4.8% year-on-year.

While the bulk of inflation is now domestically driven, with non-tradeable inflation up 0.2ppt to 5.2%, international threats could be re-emerging, with tradeables up 0.5ppt to 1.6% in the 12 months to May.

Last month’s price drivers comprised volatile items like fruits and vegetables, automotive fuel, and holiday travel.

ABS head of prices statistics Michelle Marquardt echoed her statement in the previous index, noting that “It can be helpful to exclude items [with volatile price changes] from the headline CPI to provide a view of underlying inflation.” 

Stripping said items, core inflation remains elevated at 4.0%, but down from 4.1% in April. 

However, a much bleaker outcome stoking the risk of another rate rise is the trimmed mean inflation, which accelerated to 4.4% in May, up from 4.1%. 

The latest print shows that the underlying inflation is running ahead of RBA’s expectations for trimmed mean inflation to ease at 3.8% in the second quarter. 

In his speech before the Australian Banking Association, RBA Assistant Governor Christopher Kent conceded that “recent economic data have been mixed” although “they have reinforced the need to remain vigilant to upside risks to inflation”. 

Asst Gov Kent likewise acknowledged that the current monetary policy has been particularly restrictive to households based on the current estimates of the nominal neutral interest rate relative to the cash rate. 

The neutral rate represents the cash rate level that neither stimulates nor restrains demand, balancing supply and demand and maintaining inflation at the target level. 

The RBA pegs the average of modelled estimates at around 3.5%, which, compared to the current cash rate of 4.35%, suggests policy is restrictive, but only moderately restrictive compared to previous hiking cycles.

“These estimates imply that monetary policy is restrictive and so it is continuing to bring aggregate demand into better balance with aggregate supply, as intended,” Asst Gov Kent said.

This, coupled with a bounce back in inflation, makes the RBA's 'narrow path' of sufficient restriction without tanking the economy that much trickier.

RBA likely worried, but next decision hinges on Q2 inflation

While volatile, the monthly CPI print poses a genuine risk that the RBA may feel compelled to resume its current run of cash rate hikes that have been on pause since December 2023. 

However, the central bank’s rate-setting committee has the luxury of waiting for the full Q2 CPI due on 31 July before delivering their policy decision at the next meeting in August. 

According to economists, RBA’s August Board meeting is potentially “live” based on where the Q2 trimmed mean CPI lands. 

CommBank chief economist Gareth Aird said a core print north of 1% “would test the Board’s resolve” not to tighten policy further. 

RBA Deputy Governor Andrew Hauser will speak tomorrow evening and will be a useful test for just how uncomfortable the RBA is about the lack of progress on inflation. 

Updates on Big Four rate calls: NAB pushes back forecast

CommBank, along with its Big Four peers NAB and Westpac, is tipping Q2 trimmed mean inflation to land at around 0.9% in the June quarter.

But while CommBank and Westpac are maintaining their forecast for another hold from RBA in August and cut in November, NAB broke ranks on Wednesday. 

Following the release of the May ‘24 CPI, NAB announced that it’s pushing back its rate cut call by six months to May 2025. 

From there, the bank expects one cut per quarter until it reaches 3.10% in mid-2026. 

“Economic growth has slowed significantly over the past year as the effects of monetary policy have flowed through, and the labour market has started gradually easing,” NAB’s economic team said. 

“However, progress on inflation has been slower than we (and the RBA) had expected with the May Monthly CPI indicator signalling upside risk pointing to our expectation for a Q2 trimmed-mean print of 0.9% q/q and 3.9% y/y.”

According to NAB, the mix of slow growth and gradual progress on inflation reflects the RBA’s decision to embrace a “lower for longer” approach. 

The bank added the risk for another rate hike is a likely scenario come August, “especially if the Q2 print exceeds expectations”. 

“But with the labour market easing, we don’t believe their hand will be forced.”

ANZ earlier revised its call from November 2023 to February 2025. 

Services inflation outcomes

RBA Governor Michele Bullock highlighted at her post-meeting press conference last week that there has been limited information about services inflation since the May Board meeting.

“That picture is a little more complete with today’s data in hand,” NAB senior economist Taylor Nugent said. 

Inflation in the labour-intensive services sector remained strong in May, with the cost of going to the hairdresser up by 5.5% and to a restaurant by 4.2%, for instance.

However, experts caution against interpreting breakdowns of the monthly data, given price changes are not captured for all expenditure classes every month. 

Despite noted gains, Mr Nugent said, “there is evidence of cooling in some market services components”.

“Inflation in hairdressing, sports and cultural activities slowed, while restaurants and other personal services remained relatively benign.” 

“Against the grain, insurance remains elevated,” he added.

Meanwhile, the annual price rise in new dwellings remained steady at 4.9% in May, maintaining a consistent annual price growth of around 5% for the past 10 months.

“This reflects builders continuing to pass on higher costs for labour and materials,” the ABS said. 

Rental prices increased 7.4% in the 12 months to May, down from 7.5% in April. 

Strong demand for rental properties amid tight rental markets continues to drive rental price rises, per usual.

Electricity prices spiked 6.5% over the 12 months to May, up from a 4.2% rise in the month prior, as out-of-pocket costs for electricity increased following the gradual unwinding of the Energy Bill Relief Fund rebates. 

In monthly terms, electricity prices rose 1.4%. 

“The introduction of the Energy Bill Relief Fund rebates from July 2023 has mostly offset electricity price rises from annual price reviews in the same month,” Ms Marquardt said.

“Excluding the rebates, electricity prices would have risen 14.5% in the 12 months to May 2024.”

Treasurer Jim Chalmers expects inflation to fall once the state- and federal government-backed electricity rebates come into effect on 1 July.

"The primary focus of our economic plan and our Budget is to ease pressure on Australian households and put downward pressure on inflation,” Mr Chalmers said.

However, RBA Governor Michele Bullock has reiterated that the RBA will look past these relatively short-term levers that pull down headline inflation.

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