Price pressures strengthen at start of year
Australian consumer prices climbed more than anticipated in January, complicating the outlook for monetary policy and increasing the likelihood of further interest rate tightening.
Data from the Australian Bureau of Statistics showed the monthly consumer price index rose 0.4% in January, exceeding expectations of 0.3%. On an annual basis, inflation remained elevated at 3.8%.
Core inflation, measured by the trimmed mean, increased 0.3% over the month and reached 3.4% year on year, the highest level in 16 months. The reading marks the seventh consecutive month above the Reserve Bank of Australia’s 2% to 3% target range.
Market reaction and policy outlook
The stronger-than-expected figures prompted financial markets to lift expectations for another rate hike. The Australian dollar rose 0.2% to 0.7073 US dollars, while three-year government bond futures declined. Investors now assign roughly an 80% probability to a rate increase at the RBA’s May meeting.
Earlier this month, the central bank raised its cash rate by 25 basis points to 3.85%, reversing part of last year’s easing cycle. Policymakers had projected headline inflation could rise to 4.2% by June, with core measures potentially climbing to 3.7%.
Domestic pressures remain firm
Underlying price growth remains driven largely by domestic factors. Non-tradable inflation accelerated to 4.9% in January from 4.6% previously. Electricity prices surged 32.2%, while costs for new dwellings rose 3.5%. Rental growth stayed elevated at 3.9%.
Goods inflation picked up to 3.8% during the month, while services inflation eased slightly to 3.9% from 4.1%.
Economists see tightening bias
Analysts say the persistence of inflation leaves the central bank with limited room to pause. “The Reserve Bank’s preferred trimmed mean measure was still too high for its liking,” said Stephen Smith of Deloitte Access Economics, who noted that May now appears the next key policy juncture.
Similarly, Cherelle Murphy, chief economist at EY, said inflation remains sticky enough to justify further tightening. She indicated additional rate increases are possible in the first half of the year if price pressures fail to moderate.
RBA Governor Michele Bullock is set to address the latest data at a public event in Melbourne, where markets will look for guidance on the path of interest rates.
