Steve Campbell: The call for rate cuts appears premature

What does today’s Australian inflation data mean for investors? Pendal’s head of cash strategies STEVE CAMPBELL explains the numbers and what they mean for rate cuts

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CALLS for rate cuts in 2024 now appear premature based on first-quarter inflation data.

Headline inflation rose 1% over the first quarter, resulting in annual inflation of 3.6%. Economists had been expecting a quarterly rise of 0.8% and 3.5% over the year.

The RBA’s preferred inflation measures – the trimmed mean and weighted median – also exceeded expectations by 0.2% for the quarter, rising 1% and 1.1%, respectively.

After moving to a neutral statement in its March meeting, it’s likely the RBA will take a more cautious, hawkish tone in its next statement in May.

That meeting will be accompanied by a monetary policy statement with updated economic forecasts.

From its February forecasts, the RBA sees annual headline and trimmed mean inflation for the year ending June 2024 at 3.3% and 3.6%, respectively.

Headline inflation has risen 2.77% since June 2023 and a trimmed mean of 2.95%. For the RBA’s forecasts to be realised, we need 0.48% and 0.6% for the next quarter.

Inflation forecasting is a tough caper, but if these annual forecasts were to be revised, they would more likely be higher than lower after today’s data.

A closer look at the data

Looking at the key underlying components from the Bureau of Statistics, we can see:

• The rental market remains extremely tight, with rents rising 7.8% over the past year. This is the biggest annual increase since 2009. With population growth of around 2.5%, a housing shortfall and supply lags, there is nothing in the near term to suggest the rental market will turn around soon.
  
• Insurance costs surged 16.4% over the past year, recording their highest rise since 2001. Natural disasters, higher reinsurance and claims costs were cited as by the Bureau as drivers.
  
• Electricity prices could cause volatility in the nearer term. Prices fell 1.7% in the March quarter, resulting in prices rising 2% over the past year. This is much lower compared with the 6.9% annual rise over 2023.
  
  The Energy Bill Relief Fund rebates which came into effect in July 2023 have had a significant effect on the annual number.
  
  Since June 2023 electricity prices have risen 3.9%. Excluding the rebates, they would have been up 17%. When the rebates drop out of the number (and unless they are replaced with something else) then annual electricity prices will pick up in the Q3 numbers.
  
• Education has its annual increase recorded in the first quarter of the year. The 5.9% increase in the first quarter was the largest rise since 2012.

Did anything actually fall?

Apart from a decrease in electricity prices, other falls included:

• International travel (down 5.9%)
• Furniture (down 5.6%)
• Clothing and footwear (down 1.1%).

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About Steve Campbell and Pendal’s Income and Fixed Interest team

Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.

Find out more about  Pendal’s cash funds:

Short Term Income Securities Fund
Pendal Stable Cash Plus Fund

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here