RBA governor says 'we are heading in right direction' on inflation despite price bounce

The monthly consumer price index bounced up to an annual rate of 6.8 per cent in April, well above expectations of a 6.3 per cent rise, as rents and new home costs continued to climb and shoppers were hit by big price jumps for food, including double-digit increases for staples including bread, butter and cheese.

Fuel costs were also up strongly, rising by 9.5 per cent over the year.

But the Australian Bureau of Statistics urged caution in assessing the data, particularly the high annual fuel inflation reading, which has been heavily influenced by the 22 cents per litre fuel excise cut introduced in April last year.

ABS's head of price statistics, Michelle Maquardt said if volatile items like fruit and vegetables, fuel and holiday travel are excluded, the annual rate of inflation in April was more moderate, growing at 6.5 per cent - down from 6.9 per cent the previous month.

In remarks made before the release of latest inflation reading, Reserve Bank of Australia governor Philip Lowe said the central bank's economic strategy to bring inflation down while limiting the lift in unemployment was working.

While admitting that the succession of 11 rate hikes had been painful for many, Dr Lowe said they were leading to a good outcome.

"The strategy is working. Inflation is coming down and the unemployment rate is rising but [is likely to settle] below the level prior to the pandemic," he said in an appearance before the Senate Economics Legislation committee.

In what could be his final estimates hearing as central bank boss, Dr Lowe admitted the outcome was far from assured, but "as we see things at the moment, we are on that path".

"We are heading in the right direction. It is painful, but there is hope.

"Success is not guaranteed but I think we can do it."

Markets think that higher interest rates will be needed to achieve that, judging that a 0.25 of a percentage point lift in the official cash rate to 4.1 per cent is a near-certainty in the next three months.

But the view among economists is more mixed.

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EY chief economist Cherelle Murphy said the monthly CPI figures confirmed inflation pressures are broad and "running too fast".

Though the monthly CPI can be volatile and, in this instance was heavily affected by last year's fuel excise cut, Ms Murphy said the reading would be "disappointing for the RBA and strengthens the case for tighter monetary policy".

Her view was echoed by ANZ senior economist Adelaide Timbrell, who for some time has been forecasting the cash rate to reach 4.1 per cent by August.

Ms Timbrell said the inflation reading increased the risk that the Reserve Bank would need to raise rates higher and sooner.

But betashares chief economist David Bassanese said that, despite the "noisy" lift in annual inflation, the recent trend toward easing price pressures "still seems intact".

"It is still too early to tell if Australia's disinflationary trend is waning, suggesting the RBA still has a little more time on its hands before deciding whether to lift interest rates again," Mr Bassanese said.

But he admitted there was a growing risk of at least, and possibly two, rate hikes in coming months. He identified stubborn US inflation as a key risk.

At the Senate committee hearing, Liberal senators questioned Dr Lowe closely about the impact of the recent budget on inflation, which they claim is exacerbating price pressures in the economy.

But the RBA governor described the impact of the budget on the economy as "broadly neutral".

Dr Lowe said while spending decisions in the budget were "mildly expansionary" the government's move to bank most of its revenue windfall was "mildly contractionary, so its broadly neutral".

The RBA governor said the scale of spending in the budget did not "shift the needle" in a macroeconomic sense, given the size of the nation's $2 trillion economy.