Anthony Albanese’s cost of giving: rise in inflation raises risk of rate hike

Anthony Albanese’s claims that billions of dollars in cost-of-living measures are helping fight inflation are in tatters, after new figures revealed a shock jump in consumer price growth that could force another rate hike as early as August.

Anthony Albanese in question time on Wednesday. Picture: NewsWire / Martin Ollman

Anthony Albanese’s claims that billions of dollars in cost-of-living measures are helping fight inflation are in tatters, after new figures revealed a shock jump in consumer price growth that economists say could force the Reserve Bank to deliver another rate hike as early as August.

Official data on Wednesday revealed inflation jumped to 4 per cent in the year to May, from 3.6 per cent in the month before, as the end of energy rebates drove energy bills higher, petrol prices soared, and rents continued their rapid upward march.

With inflation trending higher for three consecutive months and well above the 3.4 per cent rate last December, NAB analysts delayed their prediction for any mortgage relief by six months to May 2025 after the latest date the next federal election could be held.

Analysts from UBS and Deutsche Bank joined Judo Bank chief economist Warren Hogan to predict a 14th rate hike next month.

Despite climbing worries that cost-of-living pressures are proving harder to shift, the Prime Minister in a speech on Thursday morning will spruik his government’s record of economic management, boasting that “inflation is down” since Labor took power.

In a speech to a CEDA conference in parliament on Thursday, Mr Albanese will talk up cost-of-living measures starting from Monday – including extending $300 energy bill subsidies to every household from July, a big boost to rental assistance and broadening the stage three tax cuts to include all workers.

Mr Albanese will say the measures are part of a package that has been calibrated “so that it takes pressure off people, without putting pressure on inflation”.

“Since we came to government, just over two years ago, nearly 880,000 jobs have been created – more than half a million of them, full time jobs,” Mr Albanese will the conference.

“Inflation is down. Annual real wages growth is back. Unemployment remains at near 50-year lows. And the gender pay gap is at a record low. My colleagues and I are proud of this record.”

Independent economist Chris Richardson criticised the decisions by federal and state governments in recent budgets to pour billions of additional dollars into the economy under the guise of cost-of-living relief that could ­ultimately make life harder for struggling households by keeping inflation higher for longer.

“Governments are throwing a lot of money at the symptoms of the cost-of-living crisis, but that worsens the cause of it. And the cause is too many dollars chasing too little stuff,” Mr Richardson said. “Governments have abandoned the field in the inflation fight. We are fighting the inflation fight one-handed.”

Mr Richardson said the RBA’s battle to keep the nation on the “narrow path” to taming inflation without the need for a damaging recession was now more like “threading a needle”. And as inflation threatened to prove more difficult to budge, there was increasing risk of a monetary policy “mistake” that would eventually lead to a recession as the central bank was forced to hike rates to regain control.

“I don’t think the Reserve Bank will raise rates at its August meeting, but there’s now clearly a chance that they will,” he said. “And the bigger point is not whether rates go up or not in ­August, it’s that mortgage relief is a very, very long way away.”

Immediately following the ­release of the Australian Bureau of Statistics’ consumer price ­report on Wednesday, traders in financial markets ramped up bets on the likelihood of a rate hike to approaching 50 per cent by ­September, and to 40 per cent as early as next month’s board meeting – or twice the roughly 20 per cent chance priced in for August before the release of the figures.

The ABS data showed that among the largest price rises over the past 12 months was a 5.2 per cent jump in housing costs, including a 7.4 per cent increase in rents and a 4.9 per cent rise in home-building costs – testament to both a lack of homes for lease and the shortage of workers and materials that continue to plague the construction sector.

The gradual end of government energy subsidies – to be renewed at commonwealth and state levels next financial year – explained a 6.5 per cent ­increase in power bills in the year to May, well up on the 4.2 per cent in April.

Confirming the intense pressures on household budgets, still high petrol prices meant fuel costs were 9.3 per cent up on a year earlier, the ABS data showed, even as pump prices eased through the month.

Betashares chief economist David Bassanese described the latest consumer price report as “a shocker”, saying it “places huge pressure on the Reserve Bank to raise interest rates in August”, although “it is still not a done deal”.

The monthly figures offer only a partial read on inflation and tend to be more volatile than the more complete quarterly figures, but the increase is well above the 3.8 per cent consensus forecast by economists leading into the release and enough to further worry an RBA board that has become more “vigilant” about the risks of inflation proving more persistent.

RBA governor Michele Bullock said last week “we need a lot to go our way” to bring inflation under control without having to hike interest rates again, while the central bank board for the first time flagged big-spending budgets may be making its job harder

Mr Hogan said there was now a 75 per cent chance of a rate hike at the RBA board’s August 5-6 meeting. He said it was now clear “the inflation trend in this country is back up, not down”.

“I just can’t see how they (the RBA board) can walk away from this and have any kind inflation-fighting credibility intact,” Mr Hogan told Sky News.

“But really the risk is we’ve got a lot of fiscal stimulus about to hit the economy, with tax cuts, cost-of-living measures, we’re seeing state governments do it, it’s just unprecedented.

“The RBA potentially (has) to do multiple rate hikes over the next six months and risk a recession. Because that’s where this strategy of going softly comes undone: if you get behind the game on inflation, you have no choice but to quickly catch up, and that risks recession.”

Most analysts were not convinced rate hikes were imminent, and instead said mortgage relief was now a more distant prospect.

KPMG chief economist Brendan Rynne said the end of power bill rebates were muddying the inflation picture, and the volatile monthly figures could be following offshore precedents and bounce before returning to their downward trajectory.

“Despite this month’s unexpectedly high CPI annual rise, the RBA will not hike the cash rate further – rather it is likely that the RBA will just need to keep the cash rate at its current level for longer,” Dr Rynne said.

He predicted a rate cut in ­February.

ABS head of prices statistics Michelle Marquadt noted that the consumer price index was often affected by large moves in individual items and services, such as fuel, fruit and vegetables, and holiday travel.

“It can be helpful to exclude these items from the headline CPI to provide a view of underlying inflation, which was 4 per cent in May, down from 4.1 per cent in April,” Ms Marquadt said.

The latest inflation figures came as Reserve Bank assistant governor Chris Kent said high interest rates were inflicting a “painful squeeze” on families’ finances and so were doing their bit to slow the economy. Dr Kent, in a speech at a banking conference in Melbourne, said a cash rate of 4.35 per cent was “particularly restrictive” for households, but less so for big businesses.