Households are being warned an interest rate cut may not come until at least next year amid signs inflation isn't cooling as fast as expected.

Key inflation data released by the Australian Bureau of Statistics on Wednesday showed the Consumer Price Index (CPI) rose 1% during the March quarter – which was higher than economists had expected and above the 0.6% rise seen in the December 2023 quarter.

Housing is one of the biggest contributors to inflation as rents and construction costs remain elevated. Picture: Getty

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Over the year, the rate of inflation eased to 3.6%, down from 4.1% in December 2023, and within sight of the RBA’s 2% to 3% inflation target.

But as global central bankers say - the last mile is often the hardest - with a strong jobs market, upcoming personal income tax cuts and ‘sticky’ prices for services and non-discretionary goods potentially pushing the timing of the Reserve Bank’s first rate cut to 2025 at the earliest.

The RBA’s preferred measure of inflation known as the trimmed mean – which strips out more volatile price changes – also cooled by less than expected, inching down to 4% from 4.2% the previous quarter.

It comes ahead of next month's interest rate decision, where the RBA is widely expected to leave rates on hold. Focus will instead turn to the central bank’s updated economic forecasts and whether the latest data will change when it sees inflation returning to target.

PropTrack director of economic research Cameron Kusher said Wednesday's stronger-than-expected result would likely push out the timing of the first rate cut to early 2025.

"Annual inflation has slowed, which is positive, but quarterly inflation was much stronger than anyone was anticipating, and that increases the likelihood that interest rate cuts going to be pushed back," he said.

Financial markets are no longer pricing in a rate cut this year following last week’s robust jobs data domestically and stubbornly high inflation in the US, with interest rate futures now implying the RBA will remain on hold until at least February 2025.

Housing pressures remain

Housing remains one of the biggest contributors to inflation, with health, education and food costs also pushing up prices during the quarter.

ABS head of prices statistics Michelle Marquardt said rental inflation continues to increase at the fastest rate in 15 years.

"Rental prices rose 2.1% for the quarter in line with low vacancy rates across the capital cities," Ms Marquardt said. 

It comes as separate data released Wednesday by PropTrack revealed rents have outpaced property price growth over the past year – with median advertised asking rents up 9.1% in 12 months to $600 a week.

Mr Kusher, who authored of the latest PropTrack quarterly rental report, said while there are signs rental growth may slow from here, it's 'unlikely' they’ll stabilise or fall.

“Unfortunately for renters, things are going to get worse before they get better," he said.

“Housing construction is at decade low levels and yes, investors are coming into the market, but there's still quite a lot of investors selling out of the market as well.

“I think rents are going to continue to rise well above the rate of inflation, so for people renting, it's going to get relatively more expensive to be renting."

PropTrack director of economic research, Cameron Kusher

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Builders continue to pass on higher labour and building material costs, according to the ABS, driving up the price of newly constructed homes. However, the pace of price growth remains lower compared to 2022.

While residential construction costs have stabilised in recent months, building materials remain more than a third more expensive than before the pandemic.

Rate cuts a way off yet

While inflation is tracking lower on an annual basis, some economists warn it is still “far too soon” for the RBA to be considering rate cuts with factors such as the strong jobs market and upcoming tax cuts supporting household disposable incomes.

The higher-than-expected inflation result prompted economists at Westpac to push out the timing of their rate cut prediction, now seeing the first move in November 2024 instead of September.

“Inflation continued to unwind in the March quarter, but not quite as much as expected,” said Westpac chief economist and former RBA assistant governor Luci Ellis.

“This brings headline inflation on a year-ended basis firmly into the 3s, in striking distance of the RBA’s 2–3% target range, but the key trimmed mean measure is still at 4%.”

Stubborn inflation could see the RBA remain on hold until 2025. Picture: Getty

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Housing Industry Association chief economist Tim Reardon said the 1% quarterly gain is a 'concern'.

“Today’s CPI figures are likely to see interest rates remain high for longer as inflation becomes increasingly embedded in the economy," Mr Reardon said.

"Factors such as housing undersupply are continuing to keep CPI above the RBA’s target and risk a higher interest rate for longer than previously anticipated."

HSBC chief economist Paul Bloxham - who doesn't expect the first rate cut until 2025 - said that while the cash rate has likely peaked, there’s still a risk the next move could be up, not down.

"Today's inflation figures were a clear reminder that the high inflation challenge is not over yet," he said.

"In short, the last mile of getting inflation to fall back to the mid-point of the RBA's target band in a sustainable way looks as though it will take some time yet.

"Our central case has the RBA on hold through 2024, with cuts beginning in Q1 2025, but today's figures add to our view that there is a non-zero risk that the next move is up."