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'Diabolical' data sparks warning for Aussies waiting on interest rate cut: 'Worrying'

Annual inflation has risen to 4 per cent and it's moving away from the RBA's target zone.

RBA governor Michele Bullock overlayed with Australian homes and a graph
New inflation data is a major warning sign for Aussie homeowners as it could push the RBA towards increasing interest rates. (Source: Getty)

New inflation data is in and it's a major warning sign to every Aussie with a home loan. The Australian Bureau of Statistics (ABS) released the CPI Indicator for May, which showed an annual increase of 4.0 per cent.

That's higher than the 3.4 per cent recorded in January and February, as well as the 3.6 per cent noted in April. There are fears the Reserve Bank of Australia (RBA) could be forced to increase interest rates in August if the number doesn't go down.

The RBA said it won't consider a rate cut until inflation gets into the 2 to 3 per cent sweet spot and any move away from that target could cause them to push rates above the 12-year high they're currently on.

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Canstar’s Group Executive, Financial Services, Steve Mickenbecker, told Yahoo Finance the ABS data is "diabolical" and predicts there could be two rate increases in August and November.

He said all eyes will be on the quarterly inflation data when that drops in late July.

"Given that [the RBA is] waiting for quarterly [inflation figures], if they don't move now, are they really waiting until November?" Mickenbecker asked.

"That's really high risk."

He added: "It’s worrying news for borrowers with an increase of 0.25 per cent adding $100 to the monthly repayment on a $600,000 loan over 30 years. Even without a rate increase, a three-month extension before a rate cut adds $288 in extra repayments to the same loan."

ANZ economists had already pushed their rate cut forecast back to 2025, and Commonwealth Bank said it could well do the same if inflation doesn't come down.

Moody's Analytics economist Harry Murphy Cruise was hopeful that more time, and not further hikes were needed to quash inflation. But he was still on the fence.

"An August hike now can't be ruled out," he said.

CreditorWatch Chief Economist Anneke Thompson added the economy is "clearly" still working through some price pressures.

"Price increases will only end once enough businesses are hurt by falling demand that they are forced to stop price increases to maintain their customer base," Thompson said.

"Unfortunately, record high migration has fuelled demand in many services-based industries and in housing, which has given businesses in these non-discretionary type industries the green light to raise prices."

It's worth acknowledging something RBA governor Michele Bullock, and all who came before her, mentioned when rates were held last week.

Interest rates are a 'blunt tool' in keeping inflation down. There's a lot going on they won't control. Like sky-high rents from lack of supply, or petrol prices impacted by global wars.

Yahoo Finance contributor Stephen Koukoulas said waiting for inflation to drop to deliver a cut was "ignorant of history", which you can read more about here.

Koukoulas said July could provide some relief to inflationary pressures.

"We've got the next four monthly inflation ratings of +0.7 per cent, from a year ago, +0.3, +0.3 and +0.6. So there's a base effect in just four months of 2.2 percentage points on inflation," he said.

"So just assume we get a 0.3 per cent inflation in each of those four months...1.2 per cent, roughly; all of a sudden the annual inflation rate drops to 3.0 per cent.

"And we do know that from July we're going to be getting electricity subsidies, we're getting some rental assistance and these sorts of things, not only from the federal government but some state governments.

"So we're probably going to get some of these +0.6s being replaced with -0.6s. And so we end up getting inflation falling."

But not everyone is confident the government subsidies will help lower inflation.

"The scale and breadth of those policies risk injecting a bunch of new spending into the economy as the Reserve Bank of Australia desperately tries to tighten households' purse strings," Moody's Analytics economist Harry Murphy Cruise said.

"Treasury is hoping the savings will be squirrelled away rather than spent. But with households under the pump, the vast majority of those savings will likely leave bank accounts just as quickly as they hit them."

The RBA's decision will come on August 6.

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