Rebounding inflation heightens risks of big-spending May budget

A surprise lift in inflation to 3.6 per cent in April has hit hopes the RBA will be able to deliver a rate cut later this year and amplified fears that extra budget spending will make it harder to control prices.

Inflation has declined from its peaks but remains too high. Picture: Monique Harmer / NCA NewsWire

A surprise lift in inflation to 3.6 per cent in April has hit hopes the Reserve Bank will be able to deliver a rate cut later this year and has amplified fears that Jim Chalmers’ billions of dollars in extra budget spending will make it harder to bring price pressures back under control.

The increase from 3.5 per cent in March confounded predictions that inflation would resume its downward trajectory, and means consumer price growth has not dropped for five months after a year of rapid ­declines.

While most analysts stuck to their calls that the next move in rates would be down – albeit with climbing risks of a delay into 2025 – Judo Bank chief economic adviser Warren Hogan said the RBA board “could not walk away” from the latest consumer price report.

Mr Hogan said he believed that the unexpected second straight month of accelerating inflation meant there were even chances of a rate hike at the next RBA board meeting in just under three weeks time.

“Now we are at a point where we are living in hope that inflation will go away, rather than making serious policy decisions to get rid of it,” Mr Hogan said.

The Treasurer on Wednesday played down the significance of the new data – the first since the May federal budget.

“As we’ve said many times, the monthly inflation indicator can be volatile and is less reliable than the quarterly measure because it doesn’t compare the same goods and services month to month,” Dr Chalmers said.

“We know there is more work to do in the fight against inflation because it is still too high and people are under pressure, and that’s why the budget had such a big focus on providing responsible cost-of-living relief.”

The May budget committed $10bn in additional government spending in the coming financial year, which states have since added to with major new cost of living measures – including Queensland’s $1bn energy rebates starting from July.

Major tax cuts worth more than $20bn also come into effect in the new financial year, further complicating the task for an RBA board that has become worried enough about the outlook for inflation to consider a rate hike at its meeting earlier this month.

Independent economist Chris Richardson said Labor’s calculation that billions in extra spending from July 1 “wouldn’t poke the inflationary bear was a little brave, and it’s starting to look braver”.

More bad news on inflation came as separate ABS data showed a surprise slump in building activity in the March quarter, suggesting next Wednesday’s ­national accounts could show an even weaker than expected economy at the start of the year.

Mr Richardson said the construction figures and Tuesday’s weak retail sales figures showed “the economy is continuing to slow, but it is now slowing more than inflation is, so the squeeze is getting more painful”.

“There is good news for the economy coming in five weeks, but government money getting tipped into the economy may be rather less good news for inflation. This would be a worry for the Reserve Bank,” he said.

The ABS figures show a 3.5 per cent lift in fruit and vegetables in the year to April, the biggest increase since this time last year as bad weather hit the supply of berries, bananas, and vegetables such as lettuce and broccoli.

Housing costs added the most to the monthly consumer price figure, which does not include a number of more quickly climbing services prices captured in the more fulsome quarterly report.

Rents were up a hefty 7.5 per cent in the year to April, from 7.7 per cent in March, while building construction costs also continued to climb quickly, at 4.9 per cent.

Electricity prices were up 4.2 per cent, but would have been up 13.9 per cent were it not for taxpayer-funded energy rebates, the ABS said. Medical and hospital services jumped by 7.3 per cent in the year to April, reflecting a rise in health insurance premiums.

Mr Hogan said: “We can always dismiss individual monthly numbers, but the point of the matter is we know the first-­quarter inflation numbers were too high and raised some concerning risks, and this number moves further in that direction.”

Annual inflation on a monthly basis peaked at 8.4 per cent at the end of 2022, before retreating rapidly as the impact of Covid-era disruptions unwound.

That trend has stalled since December, with the RBA becoming more concerned that services price growth may prove more persistent as central banks here and around the world attempt to traverse “the last mile” of the journey back to moderate inflation.

NAB head of market economics Tapas Strickland said there was evidence the rapid retreat in goods inflation – which has been responsible for the lion’s share of falling price growth through 2023 – appeared to have reached its end, and even reversed.

Clothing and footwear prices climbed by 2.4 per cent in the year to April, from 0.3 per cent in the month before, the ABS data shows.

Mr Strickland said the evidence suggested inflation was proving “sticky”, but that next month’s data would provide more information on services prices.

Despite the unwelcome inflation report, the RBA would still deliver a first rate cut in November, Mr Strickland predicted.