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- Australian annual inflation falls to 6.0 per cent
- Beats estimates of 6.2 per cent
- ASX200 immediately rockets upwards by 49.9pts
- The market will now be watching the US interest rate decision
- Inflation is still double the upper range of the target band suggesting an August rate hike is still likely
Australia’s latest quarterly inflation data has dropped, showing that inflation has fallen to 6.0 per cent.
The read trumps market estimates that Australia’s inflation would read 6.2 per cent.
Treasurer Jim Chalmers welcomed today’s figures from the ABS, highlighting progress is being made towards easing pressure on household budgets.
“We know that inflation remains high but today’s data confirms we are heading in the right direction,” he said.
Following the data release, the ASX200 immediately shot up 49.9 points (0.68 per cent) to 7,389.6 points.
City Index Senior Market Analyst Matt Simpson said despite some muddied figures, the market is getting what it wanted.
“The fact that AUD/USD has tanked and the ASX200 has rallied suggests traders are looking past the headline figure and are pricing in a pause” he said.
“Whilst headline inflation was much higher than expected at 6 per cent year on year, the quarterly print undershot expectations at 0.8 per cent.”
Australian Q1 inflation data saw the read sit at 7.0 per cent, which was a decline from the prior quarter at 7.8 per cent – a 30-year high.
Quarterly reads are year-on-year, meaning that Australia’s inflation rate has fallen to 6.0 per cent.
The latest monthly data we got in June sat at 5.6 per cent, well above the two to three per cent target range, but at the time, the smallest increase in price inflation on record since April 2022 (1.4 per cent).
While the data today is promising and also suggests Australia is tracking US disinflation downward, the read is still double the upper target band of 3 per cent.
Broken down, International holiday travel and accommodation inflation rose by 6.2 per cent, new dwelling purchases up one per cent, and “other financial services” up by 2.5 per cent.
The rent problem
Rental inflation was also significant, at 2.5 per cent.
“Rents remain a concerning driver of inflation,” BIS Oxford Economics Head of Macroeconomic Forecasting Sean Langcake said.
“Vacancy rates are very low, meaning there is little relief in sight.”
Mr Langcake’s observations cut to the core of a pressing question: how will meeting the RBA’s ideal 2 per cent inflation target bring down rent prices if the issue is there’s no supply?
According to the ABS, 31 per cent of Australian households rent their property – looking at the population, that’s just short of 8 million people, in a country of only 25.7 million, where the population is aging.
From the consumer’s point of view, if high COVID-era rent prices do become “locked in,” gains to future household savings won from overall disinflation will be minimised, or risk being offset entirely, by legacy rent inflation.
This could slow down overall economic recovery, given that we’re talking about a sizeable chunk of the Australian workforce and its collective disposable income.
Big week for macro data
The next big thing to watch will be the US interest rate decision being made overnight.
Leading international financial consultancy deVere Group Founder and CEO Nigel Green is anticipating another rate hike.
“Following a pause last time, we expect officials at the US central bank will raise rates again today, taking them to their highest level in 22 years,” he said.
“The FOMC, we believe, will raise rates 0.25, to the 5.25 per cent to 5.5 per cent range, which will be the eleventh hike since early 2022 as it continues its battle against inflation.
“The markets have priced in a rate rise today. What investors will be focusing on is the press conference after the meeting, as they look for any hints about future policy path.”
The European Central Bank will also make its interest rate decision, though the Aussie market rarely pays much attention to Europe unless the US is on holiday.
The Chinese Politburo meeting this weekend may or may not see stimulus measures confirmed and explained in full.
