(Bloomberg) -- Australia’s inflation came in faster than expected in the first three months of 2024, suggesting price pressures are proving stickier and bolstering the case for the central bank to hold interest rates at a 12-year high.

Yields on the policy-sensitive three year government bonds jumped the most since May after the consumer price index advanced 3.6% from a year earlier, exceeding the 3.5% estimate, government data showed Wednesday. A closely watched core inflation gauge — the trimmed mean — rose 4%, also higher than forecast and well above the RBA’s 2-3% target.

Money markets wound back pricing for RBA easing this year, with three-year yields rising as much as 18 basis points to 4.03%. Swaps traders see almost no prospect of a rate cut in December versus about a two-in-three chance prior to the report. The currency climbed 0.7% to 65.30 US cents.

Tim Baker, head of macro research at Deutsche Bank AG in Sydney, said the report “has shades of the last mile inflation problems plaguing the US” with the quarterly reading annualizing at 4%, rather than 3%. 

From Washington to Wellington, consumer prices are proving tougher to bring down to target than markets had been anticipating at the start of the year. Wednesday’s data comes on the heels of employment figures that showed Australia’s labor market still remains tight. 

Both will feed into the Reserve Bank staff’s updated forecasts that will be released with the board’s policy decision on May 7. 

Su-Lin Ong, chief economist at Royal Bank of Canada, viewed the report as strong “across the board,” including the core measures. 

“Base effect drops out from here and will make further moderation in inflation challenging,” she said. “We could well see upward revision to the RBA’s near-term inflation forecasts and downward revision to its unemployment rate forecasts at the upcoming May Statement on Monetary Policy.”

Policymakers have expressed concern about the stickiness of services prices in Australia and the potential for inflation expectations to become unmoored the longer CPI remains elevated. Wednesday’s figures followed US data this month showing stronger price pressures and spurring concerns that inflation is becoming entrenched. 

What Bloomberg Economics Says...

“The hot first-quarter CPI report will test the RBA’s patience — we expect to hear warnings of a rate hike but don’t think it will ultimately deliver...What the inflation data do mean for rates, though, is that cuts are off the table in the very near term.”

— James McIntyre, economist. 

For the full note, click here

Australia’s 4.25 percentage points of rate increases between May 2022 and November 2023 are at the lower end of the global tightening scale, with RBA Governor Michele Bullock seeking to slow inflation without choking off economic growth. The CPI report suggests policymakers may have more work to do to cool prices. 

Bullock has expressed a willingness to be patient on inflation with the RBA’s forecasts showing CPI will only return to target in 2025. 

Devika Shivadekar, Sydney-based economist at consultancy RSM Australia, expects the RBA’s May meeting to reflect increasing concerns of a delayed return of inflation to target with oil expected to deliver fresh impetus to prices.

“Secondly, domestically driven inflation would likely be pushed higher by the federal budget being more stimulatory than not,” she said. “Add to the mix a rather resilient labor market as evidenced in the data earlier this month, the RBA is bound to stay higher for longer.”

The CPI report also showed:

  • On a quarterly basis, the most significant contributors were education, up 5.9%, health, 2.8% higher and housing up 0.7%
  • Rents continued to increase at the fastest rate in 15 years
  • Meat and seafood prices fell this quarter as increased supply and discounting led to price drops for beef, veal and lamb
  • Annual non-tradables prices, which includes goods and services that are mostly influenced by domestic factors, eased to 5% from 5.4%
  • Annual tradables were significantly lower at 0.9%, compared with 1.5% in the fourth quarter of last year. Deflation there has been seen in imported goods including footwear, clothing accessories, furniture and household appliances

--With assistance from Garfield Reynolds.

(Adds comments from economists, updates markets.)

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