Australia’s inflation rate is officially the second highest in the world, in part due to government spending staying above pre-pandemic levels.

In a grim update, Trading Economics says Australia has the second highest core (trimmed mean) inflation – which strips out volatile items – among advanced economies, with only Iceland’s being higher.

Australia’s all important trimmed mean inflation rate – which the Reserve Bank of Australia watches as it strips out volatile items – came in at 3.6 per cent in the 12 months to May.

Meanwhile, headline inflation came in at 4.0 per cent for the 12 months until May, down from 4.2 per cent in April.

Both of these figures are above the Reserve Bank’s target of 2 to 3 per cent inflation.

The cooling of inflation came largely due to the federal government temporarily halving the fuel excise, with automotive fuel prices falling 11.9 per cent in May, after decreasing 7.0 per cent in April.

Overall Australia has the seventh highest inflation rate in the G20, faring better than just Turkey, Argentina, Russia, Brazil, South Africa and the United States.

Treasurer Jim Chalmers said Australia had an inflation problem prior to the war in the Middle East, which the conflict has made even harder.

“The most recent inflation data showed tick ups in underlying inflation in areas impacted by the war, like dwelling construction costs,” he said.

“We’re seeing this across the world, with underlying inflation increasing in the United States, United Kingdom and New Zealand.”

While noting Australia has an inflation problem, Mr Chalmers points out taking on economic metric was not a fair comparison.

“If you want to make international comparisons, you need to make the full comparison – Australia has faster economic growth than every G7 country except the US and we have faster jobs growth than all of them,” he said.

Part of Australia’s higher than expected inflation rate could be attributed to how different countries measure inflation.

AMP chief economist Shane Oliver told NewsWire persistently high government spending was putting pressure on inflation.

“The problem in Australia is the temptation to spend too much money,” he said.

“This is creating problems in the economy by using up spare capacity and adding to inflation.”

Mr Oliver said the government’s recent budget did little to improve the current spending issues, with most of the savings coming later in the forward estimates.

“We saw some spending cuts in NDIS spending, but that is the other side of the next election, so there’s very little reduction in government spending in the near term, in fact it is still growing at a fairly solid clip,” he said.

Mr Oliver previously called for the government to cut costs by around $100bn over the next four years to get spending back to 25 per cent of GDP, moving the government out of the way of the private sector.

He said the May budget did little to alleviate near term pressure on inflation from high levels of government spending adding to demand, instead locking in federal spending just below 27 per cent of GDP which is well above pre pandemic norms.

Any further cost of living stimulus will only add to inflationary pressure.

“You need about a 2 per cent cut in the public sector share of GDP,” he said.

“If you did that it would take us back to levels that prevailed prior to Covid and free up capacity for stronger private sector activity and allow for lower interest rates without generating inflation.”

NED-9108-Monthly-Inflation-Indicator

Meanwhile, BDO chief economist Anders Magnusson did not specifically blame government spending but warned mortgage holders would continue to pay the price for Australia’s higher than expected inflation rate.

“The RBA can’t ignore this increase in underlying inflation (trimmed mean) and is likely to increase the cash rate in August as a result,” he said.

“The key issue for the Reserve Bank is that these broader inflation pressures, while in line with its forecast, are more difficult to reverse.

“While global energy prices may stabilise, the effects are still working their way through the economy and are likely to persist for some time.”

After its June rate meeting Reserve Bank kept the official cash rate on hold at 4.35 per cent following three consecutive rate hikes.

The official cash rate has gone from 3.60 to 4.35 per cent, with the previous three 0.25 per cent increases have already added around $342 to monthly repayments on the average loan of around $736,000, adding up to an extra $4,128 a year.

But in its minutes of monetary policy statement, the central bank confirmed it has not ruled out further rate hike pain.

A fourth hike would have lumped another $114 onto average monthly repayments.

Combined with the earlier hikes, that would have added $5,472 to costs over the year.

Rates are at their highest point since 2011, but the central bank themselves conceded inflation is far from returning to target.

In its statement on monetary policy the RBA’s most recently publicly available forecasts predicted that core inflation won’t hit the midpoint of its 2-3 per cent target band until mid-2028.

“Members noted that information received since the previous meeting had supported the view that the economy was operating with excess demand and widespread inflationary pressures,” the minutes said.

“Inflation was still materially above the board’s target and the staff’s expectation remained for underlying inflation to increase in the June quarter.”

Mr Magnusson warned the impact of the US- Iran war had hit the Australian economy as higher energy prices flowed through.

Higher transport, production and distribution costs are now flowing through to a wider range of goods and services, lifting trimmed mean inflation and signalling that underlying price pressure is building.

“This is consistent with the pattern seen in previous supply-driven shocks, where headline inflation rises first, followed by a more persistent increase in underlying inflation as businesses pass on higher costs.”

“That dynamic is now clearly playing out, and it marks a more concerning phase of the inflation cycle.”