Stocks have been under pressure as the Federal Reserve has shifted policy and signalled a likely interest rate hike in March
Stocks have been under pressure as the Federal Reserve has shifted policy and signalled a likely interest rate hike in March

Australia's inflation rate has spiked sharply, raising worries about the health of the economy and the possibility of the Reserve Bank increasing interest rates to tame skyrocketing consumer prices.

The Reserve Bank's goal range of 2-3% was exceeded in May when annual headline inflation jumped to 4%, as per the most recent figures from the Australian Bureau of Statistics.

Australia's Consumer Price Index increased to 4% in the 12 months leading up to May 2024 due to rises in the cost of housing, food, transportation, and power in addition to shifting fuel prices and vacation spending. Meanwhile, in April, the Consumer Price Index was 3.6%.

"There is a nasty upside surprise for the RBA in the latest monthly inflation figures," Asia-Pacific economist for Indeed, Callam Pickering, stated. "There is now a distinct possibility that both headline and underlying inflation measures will sit well above the RBA's expectations by midyear," the New Daily reported

He underlined that the Reserve Bank targets an inflation rate of 2-3%, aiming for the midpoint of the range, and that this data "will give the RBA a lot to think about at their next meeting," which is slated for early August.

"With inflation already at levels that are uncomfortably high, we believe that Australian households and businesses need to prepare themselves for another rate hike," said Pickering.

"It's shocking to see the outcome today," said David Bassanese, chief economist at Betashares. "The upshot is that it places enormous pressure on the Reserve Bank to not only not cut interest rates anytime soon, but potentially lift them further." "The RBA raising rates in August is still not a done deal."

Bassanese underlined the increasing pressure on the Reserve Bank of Australia, arguing that the bank may be forced to act by the June quarter CPI report's confirmation of persistent inflationary pressures, striking a careful balance between needed rate rises and preventing recession.

The RBA kept rates at 4.35% at its most recent meeting, where they have remained since November, even though persistent inflation has a major impact on mortgages.

According to comparison website Canstar, monthly payments on a $600,000 loan have increased by $1500 for households since April 2022, the New Daily reported.