Shock inflation rise puts dent in rate cut hopes
Newly released inflation data has shocked market expectations and put hopes of another interest rate cut next month in serious doubt.
Inflation data released Wednesday (27 August) has put a major dent in interest rate cut expectations.
The monthly consumer price index leapt from 1.9 per cent in June to 2.8 per cent in July, belittling market predictions of a 2.3 per cent figure.
The data from the Australian Bureau of Statistics will likely be the ammunition needed for the Reserve Bank of Australia (RBA) to keep the official cash rate on hold when it next meets on 30 September.
Its 12 August Monetary Policy Decision noted that the economic situation remained uncertain, “and monetary policy is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia”.
That response is now likely to be keeping rates on hold at 3.60 per cent.
The RBA had cut rates by 25 basis points in August, citing progress in cooling inflation and signs of economic strain due to global trade disputes.
A measure of core inflation, the ‘trimmed mean’, which reduces the impact of irregular or temporary price changes in the CPI, came in at an annual 2.7 per cent, up from 2.1 per cent in June. This is the measure the RBA aims to keep within the range of 2 to 3 per cent.
Michelle Marquardt, ABS Head of Prices Statistics, said the 2.8 per cent CPI figure is the highest annual inflation rate since July 2024, following several months of easing inflation.
The largest contributors to this rise were housing (+3.6 per cent), food and non-alcoholic beverages (+3.0 per cent), and alcohol and tobacco (+6.5 per cent). Rents rose 3.9 per cent in the 12 months to July, following a 4.2 per cent rise in the 12 months to June, the lowest since November 2022.
State governments ending rebates also led to a jump in the monthly inflation figures. The price of energy spiked 13.1 per cent in July despite prices falling by 6.3 per cent the year prior.
November now best hope of rate cut
Money market pricing now implies a less than 40 per cent chance of a fourth cut when the RBA next meets at the end of September, with an easing fully priced in for November.
David Bassanese, Chief Economist at Betashares, described the trimmed mean figure as an “absolute shocker”.
“It’s still quite possible that the RBA cuts rates in November, though it’s no longer the done deal we previously believed.”
Another who said rate cut hopes were on thinner ground was Russel Chesler, Head of Investments and Capital Markets at VanEck.
“This inflation spike, combined with the recency of the last rate cut and continued strength of the labour market, reinforce our expectation that another rate cut is unlikely before November.”
The inflation update for the first month of the quarter only covers a portion of the full CPI basket and is concentrated on goods rather than services. The ABS will have the full monthly inflation data from November onwards.
Last month, the ABS said it will begin publishing a complete monthly measure of inflation from 26 November, addressing a long-standing gap in Australia’s economic data. The development will bring the nation in line with most of its developed-world peers.
