Rising unemployment may scuttle further rate hikes

Wednesday’s CPI inflation release from the Australian Bureau of Statistics (ABS) has increased pressure on the RBA to lift rates.

The policy-relevant trimmed mean inflation increased to 4.6% year-on-year in May and is now tracking above the RBA’s forecast:

Chart by Alex Joiner (IFM Investors)

This result, in isolation, suggests that further rate hikes would be firmly on the RBA’s agenda.

One factor working against this narrative is rising unemployment. Aside from keeping inflation within the target band of 2% to 3%, the RBA’s other key performance indicator is to maintain full employment.

The April labour force release from the ABS reported that Australia’s unemployment rate rose to 4.5% and was tracking above the RBA’s forecast:

Chart by Alex Joiner (IFM Investors)

On Wednesday, Jobs & Skills Australia released its Internet Vacancy Index (IVI) for May, which reported a 3.3% decline in job advertisements over the month and year:

The decline in job ads is broad-based across the mainland:

The following chart plots the JSA IVI against the nation’s unemployment rate:

The decline in job advertisements continues to point to rising unemployment.

Later this morning, the ABS will release its labour force report for May.

Should the labour market soften, it should be enough to prevent the RBA from hiking at its next meeting, despite the worse-than- forecast rise in trimmed mean inflation.