Australia Inflation Surges 3.8%, Rate-Cut Hopes Wiped Out

UPDATE: Australia’s inflation has sharply accelerated in October 2023, delivering a surprising jump that has dashed hopes for further interest rate cuts. This latest inflation data from the Australian Bureau of Statistics (ABS) reveals a headline inflation rate of 3.8% year-on-year, exceeding the 3.6% forecast and marking the fastest rate in 10 months.

The implications are immediate: the Australian dollar surged 0.5% to US$0.6502, and three-year bond yields spiked by 11 basis points to 3.855%, the highest level since February. With these developments, the likelihood of a rate cut in May has plummeted from 40% to just 8%, while the probability of a rate hike by late 2025 has climbed to 32%.

Economists are alarmed by the report, describing it as “ugly.” They warn that the Reserve Bank of Australia (RBA) cannot consider easing monetary policy and may even need to tighten if inflation continues to rise along with persistent pressures in the services sector. The October CPI data shows a broad-based inflation increase, with services inflation at 3.9% and housing inflation soaring to 5.9%.

While the new monthly CPI series provides more granular detail, the RBA typically favors quarterly data due to the inherent volatility in monthly numbers. Nonetheless, the re-acceleration of inflation over the past four months since the June low poses a significant challenge for policymakers, especially after three rate cuts earlier this year.

Officials stress the need for inflation to return to the target range of 2-3%. However, the full impact of previous reductions in rates has yet to be felt in the economy. As Australia grapples with these rising prices, the focus now shifts to how the RBA will respond in the coming months.

Stay tuned for further updates on this developing story, as the economic landscape in Australia evolves rapidly.