Persistent inflation casts shadow over rates outlook

The road back to within-target inflation is proving bumpy, complicating the Reserve Bank of Australia's job.

A hotter-than-expected monthly inflation result released by the Australian Bureau of Statistics on Wednesday jolted financial markets and spurred several economists to change their interest rate forecasts.

For squeezed borrowers, the wait for interest rate cuts is likely to be longer and economists are warning of the chance of a hike at the next meeting in August.

National Australia Bank pushed back its expected start date for interest rate cuts to May 2025, a much longer wait than the previously pencilled-in November 2024.

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"The mix of slow growth and gradual progress on inflation reflects the RBA's decision to embrace a 'lower-for-longer' approach - a lower rate peak compared to other advanced economies, resulting in a longer period at that peak," chief economist Alan Oster said.

A hike at the August meeting was possible, Mr Oster said, but the more likely scenario was the hold extending as inflation slowed gradually alongside a weakening labour market.

A re-acceleration in the monthly inflation gauge, which is volatile and not as comprehensive as the quarterly release, was anticipated in May but the jump exceeded expectations.

The four per cent rise in the 12 months to May took annual inflation to its highest reading in six months and was above consensus forecasts of 3.8 per cent.

The trimmed mean rose 4.4 per cent, up from 4.1 per cent in April, but a separate measure of underlying inflation that strips out petrol and other volatile items moderated to four per cent from 4.1 per cent.

RBC Capital Markets, Nomura and AMP Australia economic teams also pushed back their expected start dates for interest rate cuts after the inflation readout

Chief economist Shane Oliver warned the narrow path was becoming even narrower.

"The 'narrow path' of doing too much and ending up in recession and doing too little and locking in high inflation appears to be narrowing," Dr Oliver wrote in a note.