Inflation data: Consumer price index still soaring at 3.8 per cent, chance of another interest rate rise high

Home borrowers are facing another interest rate rise in May possibly followed by more hikes, with inflation still soaring by an annual pace of 3.8 per cent in January following a surge in goods prices.

The consumer price index was above the Reserve Bank of Australia’s 2-3 per cent target for the sixth straight month, with headline inflation failing to moderate from December’s high level, and was worse than market forecasts of a 3.7 per cent increase.

The Federal government’s $75 quarterly electricity rebates expired at the end of last year, sparking a 32.2 per cent annual surge in power prices, which Treasurer Jim Chalmers acknowledged was painful.

“Ending those energy rebates was a difficult decision, and we know the impact it is having on families and on this data,” he said.

“We knew before these numbers inflation would come in higher than we’d like.”

Strong overseas demand for Australian red meat, despite US President Donald Trump’s tariffs, led to a 11.2 per cent increase in beef prices.

A global shortage of coffee beans, as a result of bad weather, coincided with a 13.5 per cent increase in tea and cocoa prices.

The start of the school year also brought bad news for parents, with education costs rising by 5.4 per cent as private school fees increased.

But even without volatile items, underlying inflation was still high, with the trimmed mean measure growing by 3.4 per cent over the year, suggesting RBA Governor Michele Bullock and her monetary policy board’s three rate cuts in 2025 may have been premature.

Deloitte Access Economics partner Stephen Smith said a May 5 rate rise was very likely, ahead of the next Budget a week later.

“Today’s inflation data means a pre-Budget rate rise remains on the table, making May a pivotal month for the economy,” he said.

“Unless the Federal Budget meets the moment and outlines significant economic and tax reform, growth will stagnate and inflation will persist for longer than necessary.”

Services inflation was still high at 3.9 per cent while goods inflation was also bad at 3.8 per cent - the worst since September 2023 during the RBA’s previous rate rise cycle as prices for clothing and footwear skyrocketed by 5.3 per cent.

Goods prices had climbed by 3.4 per cent last year, with EY chief economist Cherelle Murphy suggesting several rate hikes were now possible.

“We remain of the view that the central bank will need to raise the cash rate further, most likely in the first half of this year with further rate hikes possible given persistent inflation pressures,” she said.

“The Reserve Bank has its work cut out to get inflation back within the target band and has acknowledged the risks posed from ongoing tightness in the labour market and the recovery in household spending.”

National Australia Bank had expected headline inflation to remain at 3.8 per cent while Westpac saw it moderating to 3.6 per cent, with both major banks forecasting another RBA rate rise in May, following the release of March inflation data.

This puts pressure on Dr Chalmers to cut spending, with Ms Bullock acknowledging that both public and private demand are adding to inflationary pressures.