ASX 200 rattled by scorching hot inflation print, RBA has work to do

The ABS’ monthly inflation indicator was an absolute shocker, accelerating to 6.8% year-on-year in April from 6.3% in the previous month.

This was well-above consensus expectations of a rise to 6.4%.

The ASX 200 tumbled on the news, the Aussie dollar briefly spiked and bond yields advanced. We’ll recap all the major data points and reactions below.

Hot inflation: Blame fuel prices

“It’s important to note that a significant contributor to the increase in the annual movement in April was automotive fuel. The halving of the fuel excise tax in April 2022, which was fully unwound in October 2022, is impacting the annual movement for April 2023,” said Michelle Marquardt, ABS Head of Price Statistics.

The fuel excise cut was introduced on 30 March 2020 which lowered the tax charged on each litre of fuel sold in Australia from 44.2 cents to 22.1 cents.

“When excluding these volatile items, the annual movement of the monthly CPI indicator was 6.5 per cent in April, lower than 6.9 per cent recorded in March.”

At the headline level it was a pretty ugly surprise. But the data looks a little more positive at the core level – which takes out volatile components such as fuel, fruit and vegetables and travel. 

Monthly vs. ex-volatile items (Source: ABS)

Taking a closer look at the inflation components reveals a rather challenging dynamic:

• The most significant contributors to the increase was Housing (+8.9%), Food and non-alcoholic beverages (+7.9%), Transport (+7.1%) and Recreation (+6.4%)

• The Rents component of Housing rose to 6.1% from 5.3%

• The Electricity component of Housing was stagnant at 15.2% from 15.7%

• Transport surged to 7.1% from 0.8% in March

• Most segments in Food were unchanged year-on-year, only fruit and vegetables prices staged a notable fall from 5.9% to 3.5%

All-in-all, prices are proving to be incredibly sticky.

Markets: From bad to worse

The ASX 200 was down around 0.7% at 10:30 pm AEST. It’s now down around 1.20%.

ASX 200 intraday chart (Source: Market Index)

The Aussie dollar experienced a V-shaped move before trending lower.

AUD:USD intraday chart (Source: TradingView)

While the Australian 2-year yield is up 3 bps since the inflation print to 3.58%.

Australia government 2-year yield intraday chart (Source: TradingView)

What does this mean for the RBA?

The RBA said “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe,” at its May meeting.

Earlier this month, UBS said it expects the RBA to hike by another 25 bps to 4.10% in the July meeting, driven by the “upcoming minimum wage decision”.

But after today’s inflation surprise, will those expectations come forward to June?