Inflation is still at stubbornly high levels stirring fears of more interest rate rises that could spark a recession.
The consumer price index rose by 5.6 per cent in May, down from an annual pace of 6.8 per cent in April but still well above the Reserve Bank’s 2 to 3 per cent target.
Electricity and some staple food prices rose by double-digit figures over the year, but petrol prices have in fact fallen compared with the same month in 2022.
Treasurer Jim Chalmers said inflation was moderating after last year hitting levels unseen since 1990.
‘We expect it to stay higher than we’d like, for longer than we’d like, but still tracking in the right direction,’ he told the Property Council of Australia in Darwin on Wednesday.
The major banks are all expecting the Reserve Bank of Australia to raise interest rates again next week, which would be the 13th increase since May 2022.
Inflation is still at stubbornly high levels stirring fears of more interest rate rises (pictured is a Woolworths shopper in Sydney)
The 12 increases, so far, in just 13 months have marked the most aggressive pace of monetary policy tightening since 1989, with some economists worried about the increases tipping Australia into a recession.
The RBA isn’t expecting inflation to fall to three per cent target until June 2025 but the CPI increase in May of 5.6 per cent was smaller than market expectations of a 6.1 per cent rise.
AMP deputy chief economist Diana Mousina said the Reserve Bank would still continue hiking rates in 2023 – risking a recession – even though the inflation increase for May was smaller than expected.
‘Today’s inflation data gives the Reserve Bank room to pause hiking rates at its next meeting next Tuesday but the high level of inflation and the RBA’s concern about increasing wages growth will keep the RBA hawkish and means that another one to two rate hikes are still likely over coming months,’ she said.
Electricity prices soared by 14.1 per cent over the year, the Australian Bureau of Statistics data released on Wednesday showed.
Food prices are still rising by double-digit figures with bread and cereal prices rising by 12.8 per cent and dairy product costs going up by 15.1 per cent.
Takeaway food and dining out costs increased by 7.7 per cent, while overall food and non-alcoholic drink prices climbed by 7.9 per cent.
Housing costs – covering rents, mortgages and utility bills – rose by 8.4 per cent.
But in signs of hope, fruit and vegetable prices rose by just 2.7 per cent over the year.
The major banks are all expecting the Reserve Bank of Australia to raise interest rates again next week, which would be the 13th increase since May 2022 (pictured is governor Philip Lowe with his deputy and possible successor Michele Bullock)
Petrol prices surprisingly fell by eight per cent over the year, with crude oil prices moderating since the early months of Russia’s Ukraine invasion.
In April, fuel prices were rising at an annual pace of 9.5 per cent, demonstrating the volatility of global commodity markets more than a year after sanctions were imposed on Vladimir Putin’s regime.
Holiday and travel accommodation costs rose by 7.3 per cent annually in May but this was an improvement from April’s 11.9 per cent increase.
Insurance and financial services costs rose by 7.8 per cent, up from 6.7 per cent.
Dr Chalmers on Wednesday said the Budget surplus for 2022-23 would be bigger than the $4.2billion figure announced in May, thanks to higher royalties from coal prices.
AMP deputy chief economist Diana Mousina said the Reserve Bank would still continue hiking rates in 2023 – risking a recession – even though the inflation increase for May was smaller than expected
‘So, I’m pleased to say that two days out from the end of the financial year, we’re still on track,’ he said.
‘In fact, we’re in a significantly better position than we forecast.
‘Today, I can reveal that we’re expecting the surplus will be bigger than forecast in May.’
The aggressive rate hikes risk causing the first interest rate-induced recession since 1991, just three years after the Covid lockdowns and summer bushfires caused the economy to shrink for two consecutive quarters.
But Dr Chalmers argued a bigger Budget surplus, the first since 2007, would help bring down inflation.
‘It means delivering on what we’ve set out to do –rebuilding our buffers –and taking more heat out of the economy just as it’s needed to combat inflation,’ he said.
