Inflation ‘shocker’ puts RBA under huge pressure to raise rates

The Reserve Bank of Australia will be under “huge pressure” to raise interest rates in August, economists say, because of startling new inflation figures. It means more pain for already struggling families battling a cost of living crisis.

• No sugar coating it, the only way is up for rates

The Reserve Bank of Australia will be under “huge pressure” to raise interest rates in August, economists say, because of startling new inflation figures.

The Australian Bureau of Statistics on Wednesday reported the consumer price index (CPI) surged to 4 per cent in May from 3.6 per cent the month ­before.

Of greater concern than the increase in the headline figure was that a core measure of ­inflation closely watched by the RBA – the trimmed mean CPI – went up from 4.1 per cent to 4.4 per cent.

Leading economist David Bassanese of Betashares said the May result could “only be described as a shocker and places huge pressure on the Reserve Bank to raise interest rates in August”.

Writing for The Daily Telegraph, top-ranked forecaster and Judo Bank economic adviser Warren Hogan, observed: “The higher than expected May figures are the straw that broke the camel’s back as far as interest rates are concerned.”

Giulia Teaupa and her husband Nathan Teaupa, with their son Elon and daughter Kava, at home in Caringbah. Picture: Gaye Gerard

RBC chief economist Su-Lin Ong said the current level of interest rates was not restrictive enough to get inflation down to the RBA’s target of 3 per cent by no later than next year.

“We think the RBA should hike and it would be prudent to do so in August,” Ms Ong said.

Moody’s Analytics economist Harry Murphy Cruise noted that tax cuts and rebates from governments that kick in on July 1 would make the central bank’s job even harder.

“The scale and breadth of those policies risk injecting a bunch of new spending into the economy as the RBA tries to tighten households’ purse strings,” he said.

The Teaupa family of Caringbah.

Federal Treasurer Jim Chalmers.

Ms Ong said investment market movements implied that the likelihood of a rate rise in August had jumped from 16 per cent to 40 per cent due to the surprise CPI result.

If the RBA does lift the cash rate from 4.35 per cent to 4.6 per cent in August, monthly repayments on a $500,000 mortgage would grow by about $75, or $150 on a $1m loan.

RateCity research director Sally Tindall suggested borrowers should put their tax cuts back into their home loans.

Ms Tindall also encouraged mortgagors to ring their lender to ask for a lower rate.

Small business owner Giulia Teaupa said rising prices had been hitting her family’s budget hard.

“I did the groceries today and I didn’t even buy that much – no nappies, milk or bread – yet it was still $300,” the Caringbah mum said.

She said increasing business costs such as wages were also affecting her beauty salon. “I think a lot of small businesses are going to close,” she said.

Treasurer Jim Chalmers said inflation was too high but added that “it is not unusual, particularly with the more ­volatile monthly figures for the number to dance around and zigzag on the way down”.

Opposition treasury spokesman Angus Taylor blamed the result on a “government that has spent the last two years completely distracted, with the wrong priorities and absolutely no interest in the economic prosperity of our country”.

The details of the May CPI showed significant increases in rents, insurance and food.

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