Inflation to hit 14-year high and push RBA cash rate to 1.25 per cent

Supermarket shoppers beware: the already rapid price rises are about to increase further. Here’s when the Reserve Bank will lift the cash rate to combat it.

Inflation is set to surge to the highest level in 14 years, meaning interest rates could rise as soon as June, top economists say.

Westpac senior economist Justin Smirk forecasts the headline rate of the consumer price index will reach 4.3 per cent by mid-year, driven mainly by the rising cost of new homes.

The “trimmed mean” version of the CPI — watched intently by the Reserve Bank of Australia — is also tipped to spike well beyond what the money mandarins of Martin Place consider desirable.

The spike in cost of living pressures has households rattled — and not just here.

Young mum Ginny Anaya is always looking for specials to cut costs. Picture: Justin Lloyd

“Globally, consumers are unnerved by rising inflation,” Mr Smirk said on Thursday.

Westpac expects the RBA will raise the cash rate in August, in a bid to slow inflation.

Commonwealth Bank’s head of Australian economics Gareth Aird said it could be even sooner than that.

The button may be pressed in June, once the federal election is out of the way and the RBA sees more data on wage growth, due in mid-May.

The cost of essentials like bread, meat and dairy is a huge concern for voters ahead of the federal election. Picture: Julian Andrews

Mr Aird is tipping the RBA cash rate will rise to 1.25 per cent by June next year, from 0.1 per cent now.

That will cause the rate of inflation to drop.

“But we are not going back to what we had pre-Covid,” Mr Aird said.

Food is one of the expenses that is likely to keep on getting more expensive, economists say.

For personal trainer and father of two Joel Chant, buying decent healthy food while keeping the price as low as possible is already a challenge.

Joel Chant and daughter Sophie doing their family’s grocery shopping. Picture: Sam Ruttyn

“It’s easily $250 every week with my family of four (and) my wife shops through the catalogues,” he said. “I can’t cut down any more than that.”

Mr Chant, of Parklea, said food and grocery cost increases were concerning.

Beef prices are up more than eight per cent compared to a year ago, the CPI shows.

Vegetables have risen seven per cent.

Double Bay mother of two Ginny Anaya said inflation and rising costs are pressing issues that concern growing families like hers.

“I like everything that is on special. I’m always looking for them,” she said. “For example, I bought some extra nappies because they were (marked down).”

The fastest-rising expense during the past year has been petrol, up by a third.

That adds about $25 to the cost of filling up a car with a 60-litre tank.

RATS IN THE CPI RANKS

New costs such as rapid antigen tests could be added to the official basket of goods and services whose price movements determine the all-important inflation rate.

RATs could soon be included in the Consumer Price Index. Picture: Nicholas Eagar

But, surprisingly, less weight is now being given to fast-rising expenses such as childcare and petrol.

Inflation is measured by the Australian Bureau of Statistics’ Consumer Price Index, or CPI, published quarterly The ABS regularly tweaks not only which expenses are included in the CPI but how much importance is placed on each.

More than 1000 common outlays are tracked. Recent additions include 4K TVs and food delivery, while the cost of comic books and mutton have been dropped.

Including rapid antigen tests was under consideration, ABS CPI director Leigh Merrington said.

The weighting of petrol has fallen from 3.57 per cent of the CPI basket in 2019 to 3.28 per cent now due to a decline in total fuel bought in the depths of the pandemic.

The weighting of childcare has shrunk to 0.91 per cent vs 1.17 per cent pre-Covid after the ABS changed data source.