Jobs data next test to work out interest rate outlook
Employment figures could be vital in determining the Federal Reserve’s next interest rate move following its worrying inflation report.
Although headline inflation data fell in May, the second-round effect of higher oil prices is starting to be seen on the Australian economy.
The truncated average, a measure of underlying inflation closely watched by the central bank, climbed to 3.6 per cent in the 12 months to May, the Australian Bureau of Statistics reported on Wednesday; this was higher than forecasters expected.
Challenger chief economist Jonathan Kearns said despite the 11.9 per cent drop in fuel prices for the month, prices were still higher than before the start of the Middle East conflict, reflected in higher transport and material costs for businesses.
The former RBA official said the quarterly measure of the shortened average, which filters out some of the noise from the relatively new monthly measure, was stuck around 0.8 per cent.
“This is too high for the RBA to be comfortable with,” Dr Kearns said.
IG market analyst Tony Sycamore said May labor figures due on Thursday will provide the next major test of the economy.
The job market is showing signs of softening after the unemployment rate rose to 4.5 percent in April.
“An increase in the unemployment rate of 4.6 per cent or higher would reinforce the view that the RBA is doing enough,” Mr Sycamore said.
“A strong employment reading of 4.4 percent or lower would keep tightening risks firmly on the table, keeping tight with the June quarter inflation report scheduled for release on July 29.”
The RBA, which kept the cash rate constant at 4.35 percent at its June meeting, will announce inflation and employment figures again before its next meeting in August.
But Wednesday’s numbers were enough for Citi Australia researchers Faraz Syed and Josh Williamson to delay their forecast for the next rate hike from August to November.
“Following today’s May CPI, we lowered our shortened average forecast to 0.8 percent and headline inflation (for the June quarter) to 0.9 percent,” they said.
“The data probably gives the RBA enough room to hold rates at its August meeting.”
The pair said another increase was still justified because the real cash rate (meaning the cash rate minus inflation) is hardly positive, unit labor costs remain high and there is a risk that government spending will come in ahead of forecasts.
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