Those balancing household budgets will not like the latest economic data. Inflation figures released by the Australian Bureau of Statistics on Tuesday show the consumer price index, the key measure of inflation, rose 0.5 per cent in the March quarter – and driving that increase were essentials like petrol and housing.
Even though inflation was slightly weaker than expected, economists largely agreed the price growth was strong enough for the Reserve Bank of Australia to take interest rate cuts off the table. The annual rate of CPI growth lifted to 2.1 per cent, just above the lower end of the bank’s inflation target.
But commentators also noted that the price increases were not noted in areas that signalled economic growth, with the most significant price rises in the quarter being petrol (up 5.7 per cent) and electricity (up 2.5 per cent).
These are things households have to buy when at the same time their wages are barely lifting and their debts are high.
CBA economist Michael Blythe thinks that dynamic could impact on consumer spending, and thus affect the wider economy.
“Rising petrol prices, up 12.9 per cent over the past two quarters, are now having a negative impact on consumer spending power. In fact spending on areas that are largely outside consumer discretion, such as fuel, health, insurance, utilities etc., is on the rise, up 1.6 per cent in the quarter and 4.2 per cent over the past year,” he said.
“Trends in this ‘pain spend’ influence household’s perceptions of financial pressures, with a flow???on to sentiment and spending appetite.”
The pain was lessened slightly by a 6.7 per cent drop in fruit prices.
Underlying measures of inflation, which smooth out volatile price swings and are key to interest rate decisions, averaged just over 0.4 per cent growth in the quarter for an annual rate of 1.8 per cent.
In response, the Australian dollar lost a little ground, dropping from about 75.45 US cents prior to the release to around 75.2 US cents.
The RBA will hold its next monthly board meeting on Tuesday, but is expected to leave the cash rate at a record low of 1.5 per cent.
Hopes that March’s strong rise in employment was a turning point for the economy may prove premature as new figures show wilting demand for new workers.
Job advertisements on the internet declined 0.6 per cent in March after a revised 0.3 per cent fall in February in trend terms, Department of Employment data released on Wednesday shows.
This left annual growth at just 0.9 per cent.
Six of the eight occupational groups monitored by the department fell in the month, declining in three states and the ACT. Ending the rate cut talk
“Today’s CPI should bring to an end the debate about near-term rate cuts,” UBS economists said in a report.
“We expect core inflation to stay below the RBA’s target until [the first half of 2018], amid a housing correction that sees the RBA waiting to normalise rates until at least [the second half of 2018].”
Economists at Citi noted a lack of market-based inflation, with seasonal rises in areas such as healthcare, education, and insurance coming alongside higher petrol and housing costs
“We don’t expect much upside pressure in market determined prices in the future. Slow domestic demand growth and more competition from online and global retailers will constrain price growth in the non-food retail sector,” they said.
“More generally, low private sector wages growth and the increase in some mortgage interest rates at a time of record high household debt will prohibit many market-based CPI price lines from increasing at anything but a snail’s pace.”
Citi’s economists reckon the result is likely to stay the RBA’s hand for the rest of the year.
“For the RBA, its two main concerns are the subdued labour market and risks to financial stability. With these concerns pulling in different directions, we continue to expect no change in the cash rate this year. Any cash rate increase remains a distant possibility.
“We pencil in the first rate hike for [the December quarter of] 2018 as the RBA seeks to move away from historically low interest rates only when there is a likelihood of trend growth that removes the negative output gap.”
Capital Economics’ Paul Dales has abandoned his prediction of further rate cuts.
“The rise in underlying inflation in the first quarter, coupled with the RBA’s financial stability concerns, dramatically reduces the chances of any further interest rate cuts,” he said.
“When taken together with the RBA’s valid concerns that cutting interest rates further would threaten financial stability, today’s data suggest that underlying inflation is now at a level that the RBA will be willing to tolerate.
“As such, we are no longer expecting the RBA to cut interest rates further.”
He now expects the central bank to hold rates steady for at least the rest of the year.
Barclays’s Rahul Bajoria reckons rates wil be higher in a little over a year’s time.