As measured by the consumer price index, inflation was 5.1% higher over the year in the March quarter, way above expectations.
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 and food.
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 this week that 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 start raising rates and to do so more aggressively than what we had expected. Previously, without the conjunction of numerous inflationary events we had forecasted interest rates to remain steady but unsettling inflation news means our view has substantially changed.
With escalating inflation expectations and with the jobs market so tight it’s only a matter of time before wages growth picks up and various surveys suggest that it's already doing so.
We suggest all mortgage holders with variable rate home loans that they brace for higher repayments as it has become clearer that a series of increases are likely in the coming months. The extent of increases is uncertain as is the events and outcomes of current inflationary causes.
Stu Varidel and Your Choice Financial Planning Pty Ltd trading as Heart Financial Advisers are authorised representatives of Sentry Financial Services Pty Ltd AFSL 286786.
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