Economists say rates are here to stay until Christmas as inflation rises again

Economists are sounding the alarm after new figures show that inflation in Australia shows no signs of easing, leaving the Reserve Bank of Australia (RBA) with another dilemma as Australians await the next decision that will affect interest rates.

According to the Australian Bureau of Statistics, the annual inflation rate rose from 3.5 percent in March to 3.6 percent in April. This was due to significant increases in health insurance contributions and weather-related price spikes in fruit and vegetables.

This recovery exceeded market expectations for a 3.4 percent increase, while overall inflation has been oscillating at around 3.5 percent since December.

With only one month left until the introduction of the third tax cut stage and the associated financial injection for millions of people, economists fear that inflation could rise further.

While the stimulus package will make little difference to the lives of ordinary Australians (the average earner will get about $36 more a week), the wider impact on the economy could push prices even higher.

Some economists believe the RBA may be forced to raise interest rates again to curb inflation in demand-sensitive sectors such as consumer goods and services, thereby counteracting persistent inflation in less sensitive areas.

This would be a major blow to those already struggling to repay their mortgages, with figures showing that over a million Australians are already suffering from mortgage problems.

“The disinflationary process in Australia appears to have stalled so far this year, after experiencing an encouraging decline in 2023. The upshot of today’s inflation results is that interest rates are likely to remain at current restrictive levels for an extended period – with little relief before Christmas,” said David Bassanese, chief economist at Betashares, about the Australian Financial Report.

Market expectations are that the RBA will keep the key interest rate at 4.35 percent until May 2025, when the first rate cut of 0.25 percentage points is expected.

Treasurer Jim Chalmers sought to downplay the latest figures, saying quarterly inflation data was a more accurate measure of current price increases in Australia.

“As we have said many times, the monthly inflation indicator can fluctuate and is less reliable than the quarterly measurement because it does not compare the same goods and services from month to month,” Chalmers said.

Meanwhile, Shadow Finance Minister Angus Taylor criticised the Australian government’s spending, claiming Australia was “facing one of the highest and most persistent inflation rates of any advanced economy”.

Consumers are responding to the huge price increases with general spending cuts as relatively low wage growth puts more and more Australians in financial difficulty.

According to new data released by the Australian Bureau of Statistics on Tuesday, retail sales rose 0.1 percent in April compared to March.

This followed a decline of 0.4 percent in March 2024 and an increase of 0.2 percent in February 2024.

“Underlying retail sales remain weak, with a small increase in sales in April not enough to offset the decline in March,” said Ben Dorber, head of retail statistics at the ABS.

“Trend retail sales have been stagnating since early 2024 as cautious consumers reduce spending on non-essential consumer goods.”

Sean Langcake, head of macroeconomic forecasting at Oxford Economics Australia, described the increase as small and said retail sales had remained broadly unchanged over the past seven months.

Sales of clothing were particularly weak, falling by 0.7 percent this month.

Food sales also declined after a strong March, which was inflated by the earlier-than-usual Easter holiday.

“Consumers have held back on spending due to a range of living costs, causing retail sales growth to largely stall last year,” Langcake said.

“The budget adopted in May will provide help for private household finances: tax cuts and subsidy payments will boost cash flow from July.

“But that will likely not be enough to completely pull consumers out of their current depression. We expect retail sales momentum to remain subdued in 2024.”

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