Australian consumer prices rose more than anticipated in July, driven by increases in fuel and travel costs, with the monthly Consumer Price Index (CPI) climbing 1.0% from June, exceeding forecasts of a 0.8% rise. Annually, headline inflation slowed to 3.5% from 3.8%, but this was less than the expected slowdown to 3.3%. Crucially, the trimmed mean measure of core inflation, preferred by the Reserve Bank of Australia (RBA), increased 0.5% in the month, marking its biggest rise in a year and surpassing forecasts of 0.3%, leaving the annual pace at 3.6%. These figures have intensified concerns that inflation remains too high and persistent, well above the RBA's 2-3% target band.
The unexpected strength in the inflation data has prompted a shift in expectations for RBA monetary policy. Prior to the data release, economists largely anticipated the RBA would keep interest rates on hold at its September meeting. However, following the July inflation report, market participants increased the probability of a fourth rate hike from the RBA next month to 36% from 17%, with a move by February next year now priced at 94%. Deutsche Bank, for instance, is now forecasting a quarter-point rate hike in September, citing fresh upside risks to inflation. Other economists, like those at AMP, are now making a November increase their base case, while acknowledging a September hike is "certainly plausible."
Economists highlight that the RBA minutes from its August meeting revealed the board was already concerned about upside risks to inflation. The central bank had forecast trimmed mean inflation to slow to 3.3% by the end of the year, a projection that now appears overly optimistic given the latest data. While some analysts, such as Callam Pickering from Indeed, believe the RBA might not raise rates this year despite persistent inflation, many others, including Betashares' chief economist David Bassanese, see a "very high chance of another rate hike coming for Australia before the end of the year." The Australian dollar reacted by surging 0.2% to $0.7176, and the ASX200 experienced a dip, reflecting traders' increased anticipation of a rate hike. Housing was identified as the largest contributor to inflation, rising 5%.
