An "alarming" read on inflation in April strengthens the case for increasing the official cash rate by 50 basis points, TD Securities says.
The TD Securities–Melbourne Institute monthly inflation gauge increased by 0.4 per cent in April, following an increase of 0.2 per cent in March.
In the twelve months to April, the inflation gauge rose by 2.8 per cent, following a 2.7 per cent increase for the twelve months to March.
TD Securities head of Asia-Pacific research, Annette Beacher, said the monthly read gave a timely warning that tradable inflation would drive the official March quarter inflation print.
"This first taste of the June quarter reveals an alarming jump in headline and trimmed mean inflation, of which only a portion can be attributed to seasonality, with annual rates for both measures sitting on top of the RBA’s two to three per cent target band," she said.
Ms Beacher said TD did not share the market view that RBA would leave the cash rate at its record low 2.5 per cent for another year.
"The recent ‘soft’ March quarter CPI report masked the nasty surprise that annual tradable inflation jumped to a mid-target pace after two years of deflation," she said.
"This unwanted inflation, combined with a robust housing sector and signs that prior savings are re-fuelling consumption, suggests that the case for holding the cash rate at record low levels is no longer there."
Ms Beacher added TD's base case for lifting the cash rate by 50 basis points by year end "may look odd right now," but she said there was clear evidence that the economy is returning to trend growth, employment momentum is building and inflation pressures are not abating.
"These factors are expected to more than offset whatever lies within the May 13 budget," she said.
