The biggest surge in the cost of services in two decades and a record spike in gas prices has markets on edge for a possible rate hike, possibly as soon as next Tuesday, despite a slowdown in the annual pace of inflation in the first three months of the year.
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Australian Bureau of Statistics figures show inflation grew 1.4 per cent in the March quarter to be up 7 per cent from a year earlier, driven in part by a massive 26.2 per cent surge in gas prices, a 9.7 per cent lift in tertiary education charges, an 8 per cent jump in food and an increase of more than 4 per cent in the cost of healthcare and domestic travel and accommodation.
Treasurer Jim Chalmers said the ABS data showed that inflation was still "unacceptably high", but said the fact that it was down from the December quarter showed price pressures have peaked and are beginning to moderate.
The treasurer said although the pace of inflation was easing, households remained under pressure and the government would use its budget to provide living cost relief "which prioritises the most vulnerable people in our community".
Dr Chalmers said government measures to halve medicine costs by enabling people to fill 60-day prescriptions and the introduction of a mandatory code of conduct for gas producers were helping families meet living costs without adding to inflation.
But the treasurer deflected calls from more than 300 prominent Australians, including several government MPs, to increase the JobSeeker allowance.
Dr Chalmers acknowledged that it was "tough to live on the JobSeeker payment [which is] why we want to move as many people as we can off that payment and in to good, secure, well-paid jobs".
The headline 7 per cent increase in the consumer price index is well above the Reserve Bank of Australia's 2 to 3 per cent target band but down from a 30-year high of 7.8 per cent in the December quarter.
The increase in trimmed mean annual inflation, which excludes volatile items like fuel, was more moderate, rising by an annual rate of 6.6 per cent in the March quarter after growing by 6.9 per cent in the past three months of 2022.
Opposition treasury spokesman Angus Taylor said the ABS figures showed that inflation was "running rampant" and dismissed the Treasurer's remarks that price pressures were moderating.
"If this is moderation, then heaven help us," Mr Taylor said. "What we saw in the data is inflation strength in a broad range of goods and services. It is almost across the board."
Mr Taylor called on the government to reinstate fiscal rules aimed at achieving budget balance.
"Inflation comes from Canberra. It is time to re-establish that commitment to budget balance," he said.
The Reserve Bank of Australia paused interest rates this month after 10 successive hikes as it sought to evaluate the impact of tighter monetary policy.
But it has flagged that it retains a bias to tighten and will be guided by data on the economy's performance.
The March CPI figure has been seen as a key piece of information for the central bank in evaluating its monetary policy setting.
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According to the ABS, annual services inflation reached 6.1 per cent, its highest reading since 2001. Labour-intensive services are particularly vulnerable to shifts in employment costs and the reading may fuel RBA worries that prices pressures may prove stubborn.
Markets have lowered the odds of a rate hike next week following the inflation data but several economists think that is too optimistic and expect the RBA to deliver at least one more rate rise, perhaps next Tuesday.
EY Australia chief economist Cherelle Murphy said the strength of price pressures could cause the Reserve Bank to doubt that trimmed mean inflation will meet its forecast of 6.2 per cent by the middle of the year, adding to the risk of a further rate rise.
"Inflation remains uncomfortably high, amidst a very resilient labour market and strong business conditions. There is still a case for at least one more rate hike," Ms Murphy said.
ANZ senior economist Adelaide Timbrell said the RBA would likely hold rates steady in May but "persistently strong services inflation...suggests that more RBA tightening will be needed in coming months".
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