What could be the most important data in the past two years to provide insight into the cost of living crisis drops on Wednesday and could “trigger a rate hike” in August, economists warn.
Some traders have currently put an August rate hike at a one-in-five chance, but the inflation data could be a good moment for homeowners hoping cash rates don't reach 4.6 percent.
An increase of 0.25 per cent from 4.35 per cent would add $100 to the monthly repayment on a $600,000 loan over 30 years, although a number of Australians would have much larger mortgages.
So far, all the major banks are still predicting a rate cut as the next step from the RBA and just three months ago that looked likely when inflation for the March quarter came in at just 3.6 per cent, plummeting from the December 2022 quarterly peak of 7.8 per cent.
But then the monthly consumer price index, a measure of the cost of goods and services across the economy, rose to 4 percent in the year to May – putting a rate hike back on the agenda according to economists.
The data released on July 31 will be the “key piece of the puzzle” for the Reserve Bank of Australia (RBA) at its interest rate meeting next week, KPMG senior economist Michael Malakellis said.
It forecasts annual inflation to be 3.8 per cent – the same figure as the RBA.
“So anything above that number would lead to strong guidance on a potential rate hike,” Mr Malakellis said.
“The RBA will be very concerned about falling behind the curve in the fight against inflation.
“It took a calculated risk not to raise interest rates as aggressively as other countries but will be mindful of the dangers of allowing inflation to resume an upward trend or become entrenched.
“The cumulative risks related to continued strength in the labor market, unexpected resilience in household consumption and fiscal policies that include tax cuts and temporary cost of living make this period particularly difficult for the bank.”
Economists have expressed concern that the Stage 3 tax cuts, along with new federal and state spending, have injected an extra $46 billion into the economy this financial year, which could seriously hamper the RBA's efforts to tame inflation.
Judo economist Warren Hogan said that, unfortunately, it looked like it was going to be very difficult to bring down inflation in the current quarter based on recently released data.
Instead, he warned that there was a risk that inflation would be even higher.
“Nobody wants to hear it or believe it but it looks like underlying inflation is picking up in Australia in 2024,” he said in June.
“The 4.35 percent cash rate won't keep up with inflation. And there's a $40 billion financial bomb about to go off in a few days.”
He has warned that interest rates may need to go as high as 5 per cent to tackle inflation – adding consumer spending data revealed how little impact the current cash rate had on behaviour.
Betashare chief economist David Bassanese also agrees that the CPI report for the June quarter on July 31 is key to what happens next, although he said it will have to sit on the RBA forecast of 3.8 per cent.
“If it confirms the still-bubbling inflationary pressures evident in the monthly CPI reports over the past few months, the RBA will have no choice but to act,” he warned.
Mr. Malakellis warned that raising interest rates is a blunt tool. He said that while the RBA will recognize that if inflation resumes its upward momentum, a delay in rate rises risks consolidating inflation.
But the problem is that inflation hits services like rent, insurance, education and health – where interest rate increases don't really have an impact.
“In this scenario, the narrow path to avoid a recession while keeping inflation within the target range is full of potholes,” he warned.
“It is a challenging time for forecasting, but overall KPMG continues to assess that inflation will not surprise to the upside and that the current rate setting will create the soft landing that the RBA has sought to engineer.
“Our central scenario has been a reduction in inflation in the second half of 2024, which means that the next step in interest rates could be a cut in the first quarter of 2025, although we recognize that there are significant upside risks to this scenario.”
The RBA wants inflation back within a target range of 2 to 3 per cent by the end of 2025, but if inflation has ticked up by 1.1 per cent or more in the last quarter, that spells trouble.
