Interest rates hike more likely as living costs jump

Home and small business borrowers will be dismayed by the sharp rise in inflation to 4 per cent in the year to May, up from 3.6 per cent a month earlier. The surge increases the likelihood of another interest rates rise – the 14th since May 2022 – possibly as early as August. The CPI figure also dashes hopes of an interest rate cut later this year.

It was a “shocker’’, Betashares chief economist David Bassanese said, and it placed “huge pressure on the Reserve Bank board to raise interest rates in August”, although “it is still not a done deal”. As Reserve Bank assistant governor Chris Kent told a banking conference in Melbourne on Wednesday, high rates are inflicting a “painful squeeze” on families’ finances.

The new CPI figure, released by the Australian Bureau of Statistics, shows fuel costs were up 9.3 per cent over the year. Rising housing costs remain a problem, with rents up 7.4 per cent and home-building costs up 4.9 per cent – exacerbated by shortages of building materials and workers. Power bills were 6.5 per cent higher, up from 4.2 per cent in the year to April as earlier subsidies petered out. New subsidies, federal and state, start from Monday.

Unwelcome as it is for borrowers, the prospect of an interest rate rise is no surprise. Nine days ago, after the RBA board’s June meeting – at which it held the cash rate at 4.35 per cent – the central bank’s governor, Michele Bullock, warned that the board was prepared to “do what is necessary” to get inflation back to its 2.5 per cent target by mid-2026. She also revealed the board considered raising rates but not cutting them, saying April’s inflation figures were “a bit higher than ­expected” and “I really genuinely feel that we are in a quite complex situation here”. That meeting signalled, for the first time, growing uneasiness among RBA board members that generous federal and state cost-of-living support was working against monetary policy. “Recent budget outcomes may also have an impact on demand, although federal and state energy rebates will temporarily reduce headline inflation,” the minutes stated. They also warned about a lack of productivity gains. Wages growth appeared to have peaked but was still above what could be sustained, given productivity growth. “Although growth in unit labour costs has eased, it remains high,’’ the board said. “Productivity growth needs to pick up in a sustained way if inflation is to continue to decline.’’

Therein lie two significant challenges: first, the Albanese government’s workplace relations reforms, the latest of which begin in August, are not productivity-orientated; and second, as Patrick Commins wrote last week, a $60bn jump in federal and state government spending in the new financial year will add to inflation and risk keeping interest rates higher for longer.

New Westpac analysis showed the extra money injected was equivalent to a national “fiscal impulse” worth 2.2 per cent of GDP for the coming financial year. Westpac senior economist Pat Bustamante said the key question was whether the “growing fiscal impulse’’ was appropriate at this stage of the economic cycle. It appears not.

Without extra taxpayer-funded largesse, tax cuts kick in from Monday and most wage earners will receive pay increases. In its national minimum wage decision, the Fair Work Commission took a middle course, granting 2.6 million workers a 3.75 per cent, or $33.10-a-week, rise from July 1. But the unions’ push for extra time off, including 10 days’ paid “reproductive leave’’, must be resisted. It does not help that Queensland Labor, on a vote-buying spree for the state poll, has agreed to 10 days’ paid reproductive leave for 265,000 public sector workers.

Jim Chalmers showed little inclination on Wednesday to change course on industrial relations or spending. The government was rolling out five different types of responsible cost-of-living relief measures from Monday, he said, “at the same time as we turn big Liberal deficits into Labor surpluses”. After more than two years in office, the time for blaming former governments has passed, especially when Labor in opposition wanted the Morrison government to spend more on Covid relief. Australia’s core inflation was higher than that of the US, Britain, the euro area and Canada, where it was moderating, opposition Treasury spokesman Angus Taylor said on Wednesday.

Inflation needs to be the government’s top economic priority because it is working families, especially those on low and middle incomes (which includes many small business operators), who bear the brunt of high interest rates. Last week, a new report by finance marketplace Compare Club found four out of five Australians were suffering high levels of bill stress. Statistics released by the RBA and banking regulator APRA also show debt pressures rising, Anthony Keane wrote. Wednesday’s CPI figures confirm that inflation remains the nation’s biggest economic challenge.