The monthly consumer price index (CPI) indicator rose 3.5 per cent in the 12 months to July 2024, down from 3.8 per cent over the year to June, according to the latest data from the Australian Bureau of Statistics (ABS).
The key underlying CPI indicator rose by 3.7 per cent year-on-year and remained well above the Reserve Bank of Australia’s (RBA) upper target limit of 3.0 per cent.
While the latest CPI data shows the economy is continuing to disinflate, this process is still very gradual, said Paul Bloxham, HSBC’s chief economist.
Bloxham explained that information from the headline indicator should be discounted “more-than-usual” through the third quarter, due to the impact of the government’s recent cost-of-living relief in lowering electricity prices.
“In July, the Australian Bureau of Statistics noted that government policy measures, particularly in Western Australia, Queensland and Tasmania, saw a 6.4 per cent m-o-m fall in electricity prices, which would have risen by 0.9 per cent m-o-m if not for the policy changes. This story is likely to be echoed from August, too, when the other states received their support,” the economist said.
“As the RBA made clear in its recent statement of monetary policy, the underlying measures of inflation are the most important for the monetary policy outlook, particularly in Q3 given that the RBA expects government policies to lower annual headline inflation by 0.75 ppts below the trimmed mean, before a rebound in 2025 as the policies unwind.”
Given underlying inflation is easing at a very gradual rate amid a still fairly tight jobs market, Bloxham said: “Our central case sees the RBA on hold in 2024, with cuts not arriving until Q2 2025”.
Similarly, David Bassanese, chief economist at Betashares, said the distortions caused by the extension of the electricity subsidies is fooling no one, least of all the RBA.
“All up, the RBA is likely firmly on hold until it gets further conviction of falling underlying inflation from the more detailed and reliable quarterly CPI report,” Bassanese said.
“It will likely require at least two encouraging quarterly CPI results before it could act, suggest the first potential rate cut at this stage would not come until February next year.”
VanEck’s head of investments and capital markets, Russel Chesler, believes the RBA may opt to lift rates in November following the next quarterly inflation print.
He noted that while CPI appears to be tracking in the right direction, “we would advise keeping the champagne on ice”.
“Our position has not changed. Not only do we see the RBA holding rates until the end of the year, there is still the possibility of an increase.”
According to Chesler, there is still “a lot of strength” in the economy, with a robust labour market, low unemployment and stubborn wage inflation of 4.1 per cent.
The resilience of these persistent drivers of inflation, he said, means it is difficult to see how inflation can fall further to reach the RBA’s target range of 2 to 3 per cent.
“Let’s not forget the RBA was very close to lifting rates earlier this month. There is very little buffer to accommodate exogenous shocks, and geopolitical incidents such as the Houthis attack on a crude oil tanker this week have the potential to disrupt supply chains and drive goods and petrol prices up similar to what happened during the pandemic,” said Chesler.
Josh Gilbert, market analyst at eToro, agreed that the latest CPI reading reinforces the governor’s “recent hawkish tone”.
“Although this reading isn’t necessarily a reason to panic and shows that inflation is abating, it highlights that the easing of monetary policy isn’t likely to happen in the short term,” Gilbert said.
Earlier this week, the market was banking on a full 25 basis points interest rate cut by the end of the year. CBA’s economist, Gareth Aird, said on Tuesday he agreed with the market pricing despite Michele Bullock insisting that “a near-term reduction in the cash rate doesn’t align with the board’s current thinking”.
Commenting on this discrepancy between the RBA’s messaging and market expectations, Gilbert said: “The view of a rate cut by year that markets envisage seems optimistic, but data can change very quickly”.
“We’ve witnessed that in the US recently with the big shift in the labour market that saw a swift repricing of cuts, with the potential for a 50 bps cut next month on the cards,” he said.
“The RBA will continue to focus on the quarterly numbers that provide them with more insight, and they will get one more reading before the end of the year, but any significant shifts in critical data points, such as unemployment, could move the dial for the RBA’s path.”
eToro sees the RBA keeping rates on hold and maintaining its hawkish stance.
