RBA has more to do to curb inflation as retail and job markets still strong, economists say

Australia’s retail and job markets remain resilient even as interest rates increase at the fastest pace in more than three decades, raising the likelihood the Reserve Bank has more work to do to curb inflation.

Retail turnover in May rose a seasonally adjusted 0.7%, or the fastest pace since January’s monthly increase of 1.8%, the Australian Bureau of Statistics reported on Thursday. Economists had expected spending to shrink 0.1% after a flat result in April.

The uptick was led by a 1.4% increase in spending at cafes, restaurants and on takeaways, pushing the sub-industry gauge to record levels, the ABS said. Consumers, though, cut back on clothing and footwear and bought less in department stores.

“Most of the growth in food-related spending this year has been driven by rising prices,” said Ben Dorber, ABS head of retail statistics. Sales events and other discounting ahead of the end of the financial year also swelled spending.

UBS economists said consumer spending overall was “weakening but not collapsing”.

At 4.2%, the increase in retail sales compared with a year earlier was the slowest annual increase since September 2021. “[P]utting aside the monthly rise, our assessment is the trend has still clearly weakened across several months, given the average month-on-month growth since November 2022 is still flat” at 0.1%, they said.

The retail spending numbers are among the last datasets the RBA will get to consider before its board meets next Tuesday to decide whether to lift the official interest for a 13th time since May 2022.

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Prior to Thursday’s releases, investors assessed the chances of another 25 basis-point increase next week as about 16%, according to an ASX tracker. A fall in the monthly consumer price index in May to 5.6% – the lowest in 14 months – increased the prospects the central bank will hold off hiking the cash rate again until it has more proof of the easing of pricing pressure.

Belinda Allen, a senior CBA economist, said Tuesday’s rates verdict was again likely to be “finely balanced” decision. Her bank views the probability of a pause at 60%.

“We expect the RBA to raise the cash rate by 25bp in August, to 4.35%, to ensure inflation returns to the 2%‑3% target in a timely manner,” Allen said.

The strength of the labour market has been a feature of the economy’s rebound from the Covid pandemic in Australia and other rich nations. The economy last month added 76,000 jobs, surprisingly pushing the jobless rate down to 3.6%, the ABS said last week.

Job vacancy data out Thursday showed employers were looking to hire 431,600 staff last month, down 2% from February’s levels. In May, there were 515,900 unemployed people, implying there remains about four job openings for every five people who were out of work and looking to be employed.

“While job vacancies have fallen by around 10% over the past year, they were still high – around 89% higher in May 2023 than in February 2020, just before the start of the Covid-19 pandemic,” the ABS head of labour statistics, Bjorn Jarvis, said.

The proportion of businesses seeking at least one new employee has remained at more than one in five since May 2021. “This highlights the impact of a tight labour market on a broad range of businesses,” Jarvis said.

The private sector accounted for all of the drop in job openings over the three months to May, with the total falling from 394,000 to 385,000. Public sector vacancies remained steady at 47,000 led by demand for education and health staff.

New South Wales posted the biggest percentage drop in job vacancies at 12%. The state, though, retained the highest share among the states for firms seeking at least one additional staffer at 26.5%.