Surging inflation means interest rates could rise next week, as cost of living jumps most since GST

Consumer prices have surged by the most in more than 20 years, with the cost of living up 5.1 per cent over the past year.

The last time inflation was this high was in June 2001, when prices rose 6.1 per cent largely from the effect of the recently introduced 10 per cent Goods and Services Tax.

You have to go back to December 1995 to find an equally high reading (5.1 per cent) that was not affected by the GST introduction.

Australian consumer prices jumped 2.1 per cent in just the first quarter of this year, according to the latest data from the Bureau of Statistics (ABS).

Critically, the Reserve Bank’s preferred measure of inflation, which strips out the most extreme price moves, came in at 3.7 per cent, which is well above its 2-3 per cent target and adds to pressure for interest rates to start rising as soon as next week.

This was the highest annual level of so-called underlying inflation since March 2009, just before the Reserve Bank started its last cycle of interest rate increases between October 2009 and November 2010.

The official cash rate target peaked at 4.75 per cent in that month.

May ‘in play’ for a rate hike

Marcel Theiliant from Capital Economics said one of the key quarterly underlying inflation figures came in at 1.4 per cent, which was the highest since 1990.

“Trimmed mean inflation is now higher than at the start of any tightening cycle since the full-fledged launch of inflation targeting,” he noted.

“To be sure, we still expect the bank to wait until its June meeting before hiking interest rates as it has pledged to wait for the release of the first quarter wage figures later this month and a move before the federal election on 21st May is unlikely.

Other economists are now not so sure that a rate rise next week is off the table.

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