As measured by the consumer price index, inflation was 5.1% higher over the year in the March quarter, above expectations of 4.6% over the year.
This had been driven by lockdowns in China which were causing supply bottlenecks, rising commodity prices as a result of the Russia-Ukraine war, costs of new dwellings and the cost of fuel.
Underlying inflation, the measure used by the Reserve Bank of Australia (RBA), was 3.7% higher over the year, significantly above the RBA’s forecast.
This shock increase, the highest inflation rise in over 20 years, would prompt the RBA to act sooner than expected.
Shane Oliver, chief economist at AMP Capital, said he expected the RBA would now raise rates next week at its May meeting to bring them up from 0.1% to 0.5%.
“The latest inflation blowout adds significant pressure on the RBA to immediately start raising rates and to do so more aggressively than initially thought likely. Hiking next week will mean moving before it gets to see March quarter wages data due on 18 May which it has previously indicated its inclined to wait for and may annoy the Government as we are in the midst of an election campaign.
“But delaying will only risk an escalation in inflation expectations, with the jobs market so tight it’s only a matter of time before wages growth picks up and various surveys suggest that its already doing so anyway and waiting till June to raise rates will probably have little impact on the election outcome as everyone knows rate hikes are coming anyway.”
Russel Chesler, head of investments and capital markets at VanEck, said: “With such a quick pick up in inflation to 5.1%, which is well above market expectations, there is greater chance that the RBA will increase official interest rates in May even though we are in an election period. If, however, the central bank waits until its June meeting, then I’d expect a bigger increase in rates, most probably 40 basis points.
“I then expect monthly increases bringing the RBA rate to 1.75% to 2.25% by year end, which will place significant upward pressure on mortgage lending rates, which the big banks have already increased considerably.”
J.P. Morgan Asset Management global market strategist, Kerry Craig, said: “With central banks skipping the traditional 25bps rate hikes as they speed towards normalisation of rates, the RBA has scope to make larger moves in the coming months. However, we still expect the RBA to step lightly into the tightening cycle with a 15bps move before adopting the more traditional 25bps increases around quarterly forecasts. The inflation risk presents an upside risk to this view.”