The market’s optimism about inflation is running on fumes

Should the excise go back to full freight at the end of June, everything we’ve seen is that business will seek to recover those costs via price increases and/or higher fuel surcharges.

We heard as much from listed companies at the Macquarie Australia Conference last month and in their trading updates since.

“It’s hard to see how the interest rate increases have finished … prices are still going in the wrong direction.”

So anyone thinking Wednesday’s inflation data spells the end of interest rate rises should keep the champagne on ice.

The market is saying the RBA’s monetary policy board will not make it four rate rises in a row in June, but the August meeting is very much alive.

Come decision day on August 11, the RBA will have June quarter inflation data that it expects will paint a pretty grim picture: 4.8 per cent for the year to June 30, according to forecasts released earlier this month. It’s the sort of number that makes it hard to sit.

The wild card is oil prices, which are fuelling this most recent inflation surge. While Middle East tensions appear to be easing, the Strait of Hormuz remains closed, and oil prices are still 45 per cent higher than they were before war in Iran broke out.

Geopolitical experts like Rothschild’s Mark Sedwill are telling Australian boards to get used to oil at around $US100 a barrel for the rest of the year, which will have chief financial officers putting even more time and effort into surcharge measures.

The RBA likes to look at trimmed-mean inflation, which excludes fuel prices and other volatile items, but the reality is that most of us live in a world where we feel headline inflation more.

Petrol prices are probably the most-watched price point in society and feed into inflation expectations. It is also impossible to remove fuel prices from everyday items – the price of pavers for a new back patio, for example – given how businesses are charging more to recover higher fuel costs.

Trimmed-mean inflation increased to 3.4 per cent in April on a year-on-year basis, which was below economists’ expectations but still more than March’s 3.3 per cent. Price acceleration has not slowed, and Westpac’s economists say get ready for close to 4 per cent trimmed-mean inflation in the coming quarters.

So, it’s hard to see how the interest rate increases have finished. Yes, this inflation reading could have been worse, and unemployment data was a touch higher than tipped last week, but prices are still going in the wrong direction.

As State Street’s Dwyfor Evans put it, it “gives the RBA only modest room for optimism” and “will bias rates higher” as it seeks to manage inflation expectations. Citi’s Josh Williamson said it provided “space” to work out what the fuel price shock does longer term.

For what it is worth, markets liked the inflation data. Australia’s benchmark S&P/ASX200 jumped 40 points to 8670, while the Australian dollar fell slightly. The ASX200 remains down 1 per cent over the past month and 6 per cent since the US and Israel started attacking Iran.