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Consumer price index (CPI) data reported for the June quarter delivered a narrative of continuing inflation pressures in the Australian economy – particularly from non-tradeables such as rents and new housing construction – although a trimmed mean figure appears to have comforted investors on the question of a possible rate hike next Tuesday.
The latter certainly appeared to be the market’s interpretation, as the ASX200 moved up sharply by 1% on the news.
On a surface level, the data was on-target with expectations, as the CPI rose 1% quarter-on-quarter, in addition to a year-on-year increase of 3.8% – the latter marking first time it had risen since late 2022.
The mean figure for the June quarter sat at 3.9%, a trim back from March’s 4.0%. This was slightly higher than the RBA’s expectations of 3.8%, but lower than market expectations which had placed it at 4.0%.
Tradeables registered a rise of 1.2% compared to the previous quarter, and this was somewhat surprising, given the earlier trend of inflation softening for this goods category based on weaker consumer demand and supply disruptions being resolved.
However, it appeared that rising costs in food, clothing and fuel during this period had reversed the trend, at least for now.
For non-tradeables – which remained steady at 5.0% quarter-on-quarter – housing was still the main story, as very low vacancy rates translated to rental prices remaining high, with a rise of 7.3% over 12 months to the June quarter, although this was down from 7.8 per cent in the March quarter.
Head of Macroeconomic Forecasting for Oxford Economics Australia Sean Langcake said that inflation pressures connected to rents and new housing construction were likely to remain strong – albeit with some relief from expansion of Commonwealth Rent Assistance, which should show up in the Q3 figures.
However, he said softening in other parts of the non-tradeable category could indicate a weakening in core inflation outside of housing – and predicted that the Reserve Bank of Australia (RBA) would keep rates on-hold next week, although the possibility of a later hike was still in the offing.
“This is a challenging print for the RBA, and leaves the August policy decision finely poised,” Mr Langcake said.
“Headline inflation is in line with the forecasts presented to the board in May, which suggests the economy is still on the path the RBA anticipated three months ago.
“But inflation pressures remain broad and persistent, and there is still a strong case for tighter policy.”
Saxo Head of FX Strategy Charu Chanana also expected rates to remain on hold, although she warned that the RBA’s more cautious actions up to now in comparison to other central banks still allowed scope for later hikes.
“The softer inflation print would be a relief, and takes the pressure off the RBA to hike rates,” she said.
“The AUD could (now) have room to extend its slide lower against the USD and NZD – however, it is worth noting that expecting rate cuts from the RBA may still be premature.
“Jobs growth and retail sales remain strong, and the RBA has raised rates by less than other G10 central banks. This means dip-buyers could potentially come in if AUD/USD slips towards its support level at 0.6465.”
