Inflation drops to 4.2 per cent after fuel excise halved, interest rate hike less likely

Inflation has fallen to its lowest level since before the Iran war after fuel excise was temporarily halved, lessening the chance of an interest rate rise next month.

The consumer price index in April dropped to 4.2 per cent, down from a near three-year high of 4.6 per cent in March, after the Federal Government last month cut petrol and diesel taxes to 26.3 cents a litre until the end of June.

This was the lowest headline inflation level since February’s 3.7 per cent annual increase before the US strikes on Iran led to the Strait of Hormuz being blockaded.

Economists are now expecting the Reserve Bank to hold rates steady in June given inflation was lower than market expectations of 4.4 per cent, with the monthly increase of 0.4 per cent well below March’s monthly rise of 1.1 per cent.

“Inflation came down more than expected in April and that’s a good thing, but we know that inflation’s still too high in our economy,” Treasurer Jim Chalmers told reporters in Canberra on Wednesday.

“What we see in these numbers are some encouraging numbers but also, we understand that inflation is too high in these numbers and that’s why it’s a big focus of the Government.”

The temporary cut in the fuel excise led to a 7 per cent fall in monthly fuel costs over April but they were still 4.7 per cent higher compared with a year earlier, with Dr Chalmers lukewarm on extending the excise relief.

“We’re not anticipating extending that or expecting to extend it, but we keep it under review, really from week to week,” Dr Chalmers said.

“What we’re trying to do here is provide cost-of-living relief in the most responsible way that we can; that means in this case in a temporary way so that fuel excise relief will come off at the end of June.

“What these results show is that the Government’s decisive action to slash the fuel excise is helping to take some of the sting out of price pressures from the conflict.”

The Reserve Bank earlier this month forecast headline inflation hitting 4.8 per cent by June while the Treasury Budget papers had a 5 per cent prediction by mid-year.

“We think the impacts of the conflict in the Middle East will linger for longer,” the Treasurer said.

A lower inflation reading means the RBA may not raise interest rates again on June 16, following its next monetary policy board meeting, because unemployment last month was already higher at 4.5 per cent, or a level considered to be at the upper end of full employment.

But it could lead to an August hike that would take the RBA cash rate to a 15-year high of 4.6 per cent, Deloitte Access Economics partner Stephen Smith said, given inflation has been above the Reserve Bank’s 2-3 per cent target for nine straight months or since August last year.

“Today’s inflation result is unlikely to force the RBA’s hand in June, but it keeps an August rate hike firmly in play,” he said.

“April employment data showed a clear softening in the labour market, with unemployment rising and employment falling.”

Underlying, or trimmed mean inflation, rose moderately in April to 3.4 per cent, up from March’s annual pace of 3.3 per cent when volatile items were excluded.

“What is most concerning in today’s data is the fact that core inflation remains stubbornly high, ticking up albeit slightly yet again, despite several successive interest rate rises already this year,” KPMG chief economist Brendan Rynne said, noting inflation was above 3 per cent in six of the 11 consumer price index categories.

“So, despite headline inflation numbers falling, price growth remains far too high in the Australian economy and we are likely to see at least one more interest rate rise in the very near future to help continue to put downward pressure on demand. “

Average petrol prices dropped to $1.85 a litre following the excise relief, but they are still slightly higher than February, leading to transport costs soaring by 6.6 per cent over the year to April.

Housing costs are also increasing rapidly, rising by 6.3 per cent as a result of higher rents and mortgage repayments going up courtesy of RBA rate rises in February and March. Interest rates rose again in May to a 15-month high of 4.35 per cent.

The global oil crisis is now affecting the price of goods more than services.

Goods inflation climbed by 4.7 per cent over the year, with clothing and footwear costs surging by 6.1 per cent.

Meat and seafood prices rose 5 per cent, with beef and veal prices surging by 11.9 per cent as lamb prices soared 14.6 per cent thanks to strong overseas demand for Australian red meat.

Services inflation went up by a more modest 3.5 per cent with education costs rising by 4.8 per cent, ahead of health costs climbing by 3.9 per cent.