EDITORIAL: Stubborn inflation feeds fear of more rates pain to come

Of the many elements that play out in the economic and political debate one factor carries much weight — inflation.

The inflation numbers sit at the very heart of so much of our lives.

And the Reserve Bank of Australia uses them as an indicator as it sets the cash rate — which flows through to interest rates.

The RBA has already increased the cash rate three times this year, and so updated inflation statistics are watched closely.

The latest inflation figures, released on Wednesday, brought little comfort.

Headline inflation moderated in May as the effects of the Federal Government’s fuel tax relief artificially reduced consumer prices.

The consumer price index dropped to 4 per cent, down from an annual pace of 4.2 per cent in April.

Fuel prices last month rose by an annual pace of 7.7 per cent, down from 18.6 per cent in April, which brought down headline inflation.

But this was not the full story.

The RBA focuses on underlying, or trimmed mean inflation, which strips out the items with the largest price changes.

And on Wednesday that came in at a two-year high of 3.6 per cent, up from 3.4 per cent.

As it raised fear that the RBA may seek to tackle inflation by increasing the cash rate again in coming months, Treasurer Jim Chalmers was quick to get on the front foot, and perhaps to divert attention.

“To see headline inflation come down for the second month in a row was a very welcome development,” the Treasurer told reporters.

“In other countries, it’s going up. Here in Australia it’s coming down.

“When it comes to the trimmed mean — the measure of underlying inflation — we’ve made it clear for some time, that the costs and consequences of the war in the Middle East will be felt for some time.

“The Government’s efforts to cut the fuel excise are part of the story,” he said.

The existing 32¢ a litre relief expires on June 30 and is being temporarily replaced by a 16¢ a litre tax cut until August 2.

Dr Chalmers also suggested the Federal Government didn’t have a preferred measure of inflation — unlike the RBA.

Shadow treasurer Tim Wilson said Labor spending was to blame for the rising underlying inflation number, with government payments at a four-decade high outside COVID.

There are fears of more pain for home loan borrowers and consumers.

Westpac warned of rate rises in August and September.

This comes after preliminary figures released this week by Cotality showed the capital city auction clearance rate had slumped.

Another increase in interest rates would be a further drag on the market — and on home prices.

The Albanese Government says its Budget is aimed at discouraging investors from targeting property and on helping young first-homebuyers into the market in the name of “intergenerational equity”.

But even first-homebuyers will be hit if inflation continues to sit too high or rises — and rates spiral with it.

The consequences of the Budget — intended and unintended — will take some time to fully emerge.

Responsibility for the editorial comment is taken by Editor-in-Chief Christopher Dore