The trajectory for mortgage bills in 2024 has been thrown up in the air this week after the RBA struck a tough tone on inflation at its May meeting, warning price pressures are too persistent.

Renewed fears about inflation for services like rents and insurance, as well as a new spike in petrol prices are behind the turn for the worse, experts said, with rate cuts now looking unlikely.

Economist Nicki Hutley said central bankers are facing a tough challenge moving the Consumer Price Index from 3.6 per cent to the 2 to 3 per cent target band, which is forecast in late 2025.

That’s because many of the most stubborn areas of inflation are difficult to address with rates.

“The next change in rates being a cut is based on RBA forecasts being met,” Hutley explained.

“The March quarter was a marginal increase [in inflation], but the fact it was still higher than [the RBA] expected has put people on edge.”

It all means another rate hike is still a possibility, as RBA governor Michele Bullock admitted earlier this week after the bank decided to keep rates on ice at a decade-high 4.35 per cent.

“I hope that we don’t have to raise interest rates again,” Bullock said, referencing bill pain.

“Having said that, if we think we have to, we will.”

Hutley said that while “the sky isn’t falling” on the RBA’s inflation forecasts yet, another hot prices reading for the June quarter could change that and force central bankers into a reassessment.

“If you were to get a miss on the upside in the June quarter you would see rates rise in August,” Hutley said.

Drivers of renewed inflation fears

The gloomier outlook for rates has been driven by a few factors over the first few months of 2024 that have made inflation more stubborn than anticipated.

Some are international, including petrol bills, which have been on the rise early this year amid a bounce in oil prices that has resulted in even the lowest prices in major capitals soar past $2 a litre.

Another big part of the story, economists say, is price growth for services – something that has been a long-running concern for the Reserve Bank and continues to prop up the underlying CPI.

Some services, such as insurance and rents, are suffering from the highest inflation in decades for reasons that interest rates can’t address, including natural disasters and housing shortages.

Other services, such as hairdressing and education, have also been rising fast amid stronger wages growth, which has peaked but continues to worry the RBA amid poor productivity growth.

The RBA said after pausing rates this week that services inflation is a “key uncertainty” in 2024.

“It is expected to ease more slowly than previously forecast, reflecting stronger labour market conditions including a more gradual increase in the unemployment rate,” the RBA board said.

Budget key to outlook

Hutley thinks the federal budget next week will be important for the outlook for prices and ultimately rates, saying Treasurer Jim Chalmers will need to strike a careful fiscal balance.

On the one hand, the government is likely to extend cost-of-living relief for Australians struggling with utility bills, while also touting their changes to the stage-three tax cuts (starting in July).

But economists warn additional spending could add heat to the economy before the next election, with the government keen to see a rate cut before the polls and not another increase.

The stage-three tax cuts are a key risk because putting more money in the pockets of families as the RBA is trying to reduce demand could make inflation harder to push back to the target.

Encouragingly, however, survey data published by National Australia Bank on Friday found that only a small minority (8 per cent) plan to spend their windfall on discretionary purchases.

A much-larger 36 per cent actually plan to save the money amid broader cost-of-living pressures.