Inflation drops to 4.2 per cent after fuel excise halved, interest rate hike less likely

Inflation has fallen to its lowest level since before the Iran war after fuel excise was halved, lessening the chance of an interest rate rise next month.

The consumer price index in April dropped to 4.2 per cent, down from a near three-year high of 4.6 per cent in March, after the Federal Government last month cut petrol and diesel taxes to 26.3 cents a litre until the end of June.

This was the lowest headline inflation level since February’s 3.7 per cent annual increase before the US strikes on Iran led to the Strait of Hormuz blockade, sparking predictions from economists of the Reserve Bank holding rates steady in June.

“Inflation came down more than expected in April and that’s a good thing, but we know that inflation’s still too high in our economy,” Treasurer Jim Chalmers told reporters in Canberra on Wednesday.

“What we see in these numbers are some encouraging numbers but also, we understand that inflation is too high in these numbers and that’s why it’s a big focus of the Government.

“We think the impacts of the conflict in the Middle East will linger for longer.”

The Reserve Bank earlier this month forecast headline inflation hitting 4.8 per cent by June while the Treasury Budget papers had a 5 per cent prediction by mid-year.

A lower inflation result means the RBA may not raise interest rates again on June 16 following its next board meeting because unemployment last month was already higher at 4.5 per cent, or a level considered to be at the upper end of full employment.

But it could lead to an August hike, Deloitte Access Economics partner Stephen Smith said, given inflation has been above the Reserve Bank’s 2-3 per cent target for nine straight months or since August last year.

“Today’s inflation result is unlikely to force the RBA’s hand in June, but it keeps an August rate hike firmly in play,” he said.

“The RBA will necessarily hike rates at its next meeting. April employment data showed a clear softening in the labour market, with unemployment rising and employment falling.”

Underlying, or trimmed mean inflation, only rose moderately in April to 3.4 per cent, up from March’s annual pace of 3.3 per cent when volatile items were excluded.

“What is most concerning in today’s data is the fact that core inflation remains stubbornly high, ticking up albeit slightly yet again, despite several successive interest rate rises already this year,” KPMG chief economist Brendan Rynne said, noting inflation was above 3 per cent in six of the 11 consumer price index categories.

Average petrol prices dropped to $1.85 a litre following the excise relief, but they are still slightly higher than February, leading to transport costs soaring by 6.6 per cent over the year to April.

Housing costs are also increasing rapidly, rising by 6.3 per cent as a result of higher rents and mortgage repayments going up courtesy of RBA rate rises in February and March. Interest rates rose again in May to a 15-month high of 4.35 per cent.

The global oil crisis is now affecting the price of goods more than services.

Goods inflation climbed by 4.7 per cent over the year, with clothing and footwear costs surging by 6.1 per cent.

Services inflation went up by a more modest 3.5 per cent with education costs rising by 4.8 per cent, ahead of health costs climbing by 3.9 per cent.