Australian Inflation Stays Strong, Highlighting Challenge Facing RBA

SYDNEY—Australian consumer price inflation remained strong in the latest quarter, illustrating the challenge the country’s central bank faces in bringing inflation back to target and adding uncertainty around the timing of interest-rate cuts.

The consumer-price index rose by 3.6% in the March quarter from a year earlier, meaning the annual inflation rate is now more than half of its peak at the end of 2022, data from the Australian Bureau of Statistics showed. Still, CPI rose by 1.0% on a quarterly basis, accelerating from the 0.6% increase recorded for the three months through December.

The ABS’s monthly CPI indicator rose 3.5% in the 12 months to March.

Housing and education were again among the main drivers of inflation in the March quarter. “Rents continue to increase at their fastest rate in 15 years,” Michelle Marquardt, head of price statistics at the ABS, said on Wednesday.

Central banks around the world are finding the last mile in their battle to tame inflation to be the hardest since they began raising interest rates at an unprecedented clip in the aftermath of the Covid-19 pandemic. That challenge has led to a redrawing of expectations around when central banks will start to loosen policy and provide borrowers with relief on debt costs.

In the U.S., stubborn inflation persisted in March, derailing the case for the Federal Reserve to begin reducing interest rates in June. Higher-than-expected CPI rattled asset classes, pushing stocks down on the day that the report was released and driving up bond yields.

Many of the drivers of inflation in the U.S. also confront the Reserve Bank of Australia in its deliberations around when to pivot toward a dovish stance on rates. Global energy prices are higher on geopolitical tensions, which is significant for Australia as a large importer of crude oil.

Still, Australia also faces domestic price pressures in areas such as healthcare and housing that complicate the RBA’s efforts to get inflation back into its 2% to 3% target band by the end of next year and muddy the outlook for interest rates.

The next few months are likely to witness such events as a reasonably big rise in the minimum wage of Australian workers and the delivery of generous income tax cuts midyear. These will coincide with a federal budget that is likely to include new spending measures designed to take the pain out of rising living costs.

As a result, economists are divided over whether the RBA will be confident enough that inflation is under control to cut interest rates this year, and some think it will be the last major central bank to loosen policy.

The Australian dollar strengthened against the greenback as investors bet on the RBA staying on hold for longer in the wake of the CPI data. Australian government bonds slumped in response to the strong inflation data, with both 2- and 10-year yields rising after the release.

Westpac on Wednesday scrubbed its call that the central bank would lower interest rates in September, instead seeing a maiden cut in November.

“All told, the data reinforce our conviction that the RBA is unlikely to cut rates before 4Q,” said Abhijit Surya, Australia and New Zealand economist at Capital Economics. “If anything, the slew of upside surprise raise the risk that the bank will feel the need to hike rates further.”

Four in five Australians say they have changed their investment and savings goals over the past 12 months, with 44 percent doing so primarily to make ends meet during the cost–of–living crisis. A further 25 percent say they’ve switched strategies to protect their wealth against inflation, according to a new survey by financial advisory firm, Findex.

The Superannuation and Retirement Insights report shows Australians have also changed their goals to grow their wealth (31 percent), to create a regular income stream (29 percent) and to reduce taxes (17 percent). Transferring wealth to their children or other family members has motivated 10 percent of Australians to alter their investment plans, which is likely reflective of the increasing role played by the Bank of Mum and Dad in young people’s first home purchases.

The report found that traditional investment avenues, such as property and superannuation, remain the most popular choices, with more than eight out of 10 survey respondents ranking these asset classes highly. But there is also an increasing inclination towards investments that offer the potential for quicker returns, additional perceived safety, and better liquidity or accessibility to funds.

Eighty percent of survey respondents also nominated bank savings as among their top five investment choices right now, followed by shares (66 percent) and cash (51 percent).

“This shift reflects a broader strategy to mitigate current financial uncertainties, balancing the pursuit of long-term wealth accumulation with the need for immediate financial security,” the report says.

While superannuation is considered a cornerstone investment for retirement and long-term wealth accumulation, 85 percent of Australians are exploring investments outside superannuation. The most common investments outside super are bank savings (64 percent), property (38 percent), cash (35 percent) and shares (34 percent).

However, when the data is broken down by generation, stark differences are revealed in how each age cohort chooses to invest their spare income and why.

Most popular investments outsider super and the motivations to invest by generation

Baby Boomers (born 1965-1964)

Outside superannuation, Baby Boomers prefer to invest in bank savings (60 percent), property (50 percent) and shares (46 percent).

By far, their primary motivation for investing is planning for retirement (80 percent). They also want to build wealth (51 percent) and support their children or other family members (25 percent). Other motivations include preserving wealth to beat inflation (22 percent) and paying off a mortgage or other debt (20 percent). They are the least likely generation to be saving for an investment property.

Gen Xers (born 1965–1980)

Gex Xers prefer to invest in bank savings (57 percent), property (43 percent) and shares (36 percent).

They are motivated to invest for retirement (66 percent), to build wealth (50 percent), to save for emergencies (36 percent), and to pay off a mortgage or other debt (30 percent). Interestingly, Gen X is the generation most concerned with supporting their children or family members (33 percent). This may be because Gen Xers have grown up during Australia’s long-standing property boom that began in the late 1990s and continues today.

Millennials (born 1981-1996)

Millennials have the strongest interest in bank savings as an investment avenue (70 percent), followed by property at 41 percent. They also like cash (35 percent) and shares (33 percent). Millennials have the highest uptake of exchange-traded funds (ETFs) at 21 percent. ETFs are a relatively new type of asset class, with the first ones trading on the ASX in 2001. ETFs are a basket of shares that can be purchased in a single transaction for instant diversification. Millennials are also the generation most interested in cryptocurrencies, with 22 percent invested.

Their biggest motivations for investing are to build wealth (55 percent), save for emergencies (50 percent) and plan for retirement (49 percent). They also want to support their kids (32 percent) and pay off their mortgage (32 percent). Millennials are the generation most likely to be saving for an investment property (28 percent) rather than a first home (17 percent).

Gen Zs (born 1997-2009)

Gen Zs spread their money across more asset classes than their elders. They like investing in bank savings (66 percent), cash (42 percent), shares (22 percent), ETFs (17 percent), property (14 percent) and cryptocurrencies (13 percent).

While Gen Zs are the youngest age cohort within the survey, they also have long-term goals just like their elders. The biggest motivation to invest among Gen Zs is to build wealth (52 percent). More Gen Zs are saving for a first home than any other generation, with 42 percent pursuing this goal. They are also the generation most concerned with preserving wealth to beat inflation (29 percent). Gen Zs also want short-term security, with 46 percent saving for emergencies. They’re also the generation most likely to be saving for other major purchases like a car or holiday (41 percent) and investing just for enjoyment (26 percent).