Australia inflation supports case for RBA rate rise

Australia's inflation data supports the case for another Reserve Bank rate rise, according to CreditorWatch Chief Economist Ivan Colhoun, who sees November as the most likely timing for the next move.

The monthly consumer price figures showed a mixed picture. The trimmed mean measure of core inflation rose 0.4% month on month in May and 3.6% year on year, up from 3.4% year on year. Colhoun said the result was higher than expected but still in line with the Reserve Bank's forecasts.

The stronger reading was driven largely by housing-related costs. Rents rose 0.4% month on month, while prices for newly constructed dwellings increased 0.9% as builders passed on higher fuel surcharges and materials costs.

Colhoun said those pressures were direct effects of the Iran conflict and may ease in the coming months if oil prices normalise and shipping disruptions through the Strait of Hormuz unwind. He pointed to early signs of that adjustment in the postal category, which includes couriers, where prices fell 0.9% month on month after rising 6% in April.

"There was some good news in today's CPI release with the first reports of some price falls as fuel surcharges were reduced. That's an important assumption I'm making, which suggests the inflationary surge currently flowing from the Iran conflict will not only dissipate but much will reverse over coming months as fuel prices normalise and supply disruptions unwind as shipping through the Strait of Hormuz returns to normal," Colhoun said.

That leaves a separate concern for policymakers in the domestic economy. Colhoun argued that wage growth is still feeding through to service prices and could keep inflation above the Reserve Bank's 2.5% target for an extended period.

He noted that the Australian Bureau of Statistics attributed higher wages to price increases in childcare and in meals out and takeaways. In his view, the Fair Work Commission's decision to award a 4.75% wage increase from 1 July will make it harder for inflation to return to target without further monetary tightening.

"However, that still leaves Australia with a labour market inflation problem, with the recent 4.75% national wage case decision likely to sustain price rises at rates nowhere near consistent with the RBA's 2.5% aims. That suggests the Bank isn't finished tightening as yet and my expectation remains of a slow or elongated tightening cycle as growth is supported by the global AI, defence and renewables boom, with mining adding at the margin too," Colhoun said.

Policy outlook

The second-quarter CPI data will be important in assessing the chance of an August move, but Colhoun does not expect the Reserve Bank to act that soon. His central view is that the board will wait for more evidence on inflation, economic activity and developments in the Middle East before lifting rates again.

He added that markets may be underpricing the risk of an August increase, even though his base case remains a later move. He said the Reserve Bank's own forecasts in May already implied that further tightening beyond the current 4.35% cash rate would be needed to ease capacity pressures in parts of the economy and the labour market.

"My bias is that not enough is priced for August, but my base case is the Board continues to await more information about the progress of the economy, inflation and the Middle East before tightening further in November," Colhoun said.

He also argued that the central bank's liaison with businesses will matter in the coming months, especially if it points to broader shifts in pricing behaviour and wage demands. Such evidence would strengthen the case that inflation is becoming more entrenched across sectors rather than remaining tied to temporary energy and supply shocks.

Labour focus

Attention will now shift to labour market data, which Colhoun said could reverse the previous month's signs of weakness. He attributed that earlier softness to calendar effects linked to Easter, school holidays and the ANZAC Day holiday across several states.

If employment and unemployment data come in stronger than expected, that could reinforce the argument that economic demand remains firm enough to sustain price pressures. For the Reserve Bank, persistent labour market strength would complicate hopes that inflation can ease back to target without additional action.

Colhoun said too many components of core inflation remain above 4%, while too few are below 2%, making a return to the 2.5% target difficult in the near term. That broad distribution of price growth, rather than a single volatile category, is one reason he believes it is premature to call the end of the tightening cycle.

"My base case remains of a continuing slow/elongated tightening cycle in Australia, underpinned by the global AI, defence and renewables investment boom, with mining also benefiting. Further tightening remains a significant risk. My expectation is the RBA will continue to observe inflation and the economy for a while longer and next tighten in November," Colhoun said.