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.

ANZ said the risk of a May rate hike had increased, after underlying inflation without volatile items rose by 3.4 per cent, with the bank expecting it to remain above the RBA target into 2027.

“This data does add to the relatively one-sided risk that a hike could occur,” senior economist Adelaide Timbrell told The Nightly.

“It will take some time for both the headline and trimmed mean inflation figure on an annual basis to reach the 2-3 per cent target.”

The Federal Government’s $75 quarterly electricity rebates expired at the end of last year, sparking a 32.2 per cent surge in annual 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.

“These are the sorts of numbers that we expect to see throughout the first half of the year while the Government’s energy rebates come off.”

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.

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. Prices for clothing and footwear skyrocketed by 5.3 per cent, following the end of the pre-Christmas Black Friday sales.

Goods prices had accelerated from last year’s pace of 3.4 per cent, 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.”

Three of Australia’s Big Four banks, including Commonwealth, see a May hike from RBA governor Michele Bullock and her monetary policy board. ANZ still sees rates staying on hold with a hike still a possibility.

This puts pressure on Dr Chalmers to cut spending, with Ms Bullock acknowledging that both public and private demand are adding to inflationary pressures, but the Treasurer is yet to announce specific Budget cuts.

“People can expect in our fifth Budget in May that there will be more savings just like there have been savings in the first four budgets as well,” Dr Chalmers said.

“Sometimes what happens here is our political opponents deliberately and dishonestly try and conflate two things. The first point, that public demand is part of the calculation of aggregate demand in our economy, is not contested by me or by anyone who thinks about these issues.”

Inflation climbed above the Reserve Bank target in August, after the RBA that month had cut interest rates for the third time since February and May last year.

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.