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Inflation data gives RBA another reason to pause, but risks ‘haven’t entirely abated’

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The latest monthly CPI indicator has led to a consensus among most economists regarding the RBA’s next move.

Inflationary pressures continued to ease during July, according to the latest monthly consumer price index (CPI) indicator from the Australian Bureau of Statistics (ABS), further increasing the likelihood of another pause by the Reserve Bank of Australia (RBA) at its next meeting.

The monthly CPI indicator showed that inflation eased to 4.9 per cent over the 12 months to July, down from 5.4 per cent in June and a peak of 8.4 per cent last December, while the trimmed mean CPI indicator rose by 5.6 per cent, the smallest annual increase since last July.

Reacting to the data on Wednesday, HSBC chief economist Paul Bloxham and economist Jamie Culling said that inflation was “clearly past its peak” in both the headline and core measures.


“Today’s gauge on inflationary pressure likely provides the RBA with some added evidence favouring holding its cash rate steady at 4.10 per cent at its September meeting,” they said.

“The Australian economy appears to be traversing the ‘narrow pathway’ the RBA hoped for, with inflation heading in the right direction.”

The HSBC economists also pointed out that the RBA foresaw “a credible path back to the inflation target with the cash rate staying at its present level” in its August meeting minutes.

Emma Lawson, fixed income strategist at Janus Henderson Investors, said the data would allow the RBA to “continue to sit back and assess the economy further in the near term”.

“However, inflation risks haven’t entirely abated, with dwelling costs remaining particularly high, driven by rents,” she added.

“The RBA should remain sensitive to inflation risks, as outside of the more volatile aspects of the CPI (food, fuel, and holidays) prices remain stickier.”

BetaShares chief economist David Bassanese suggested that the overall continued decline in inflation further cemented the case for the RBA keeping the cash rate unchanged.

“My base case remains that the RBA has now concluded raising interest rates. It will remain on hold for the remainder of this year with the first interest rate cut now expected in April 2024, with two further rate cuts pencilled in over the remainder of next year,” he said.

Meanwhile, Commonwealth Bank economist Stephen Wu described the data as a “welcome and continued sign” of the progress that the RBA is making in returning inflation to target.

“We have long expected the annual rate of inflation to move below 4.0 per cent by year-end, a more aggressive decline than the RBA are expecting,” he said.

In its latest statement on monetary policy, the RBA forecast that annual headline inflation will fall to 4.1 per cent in December. It is then expected to decline to 3.6 per cent in June 2024, 3.3 per cent in December 2024, 3.1 per cent in June 2025, and 2.8 per cent in December 2025.

However, Mr Wu warned that progress on inflation was “not likely to be smooth”.

“The monthly CPI is only a partial read given that not every item in the CPI basket is measured monthly. And there are seasonal patterns in price changes to account for too. As a result, the monthly CPI indicator has proven to be fairly volatile over recent months,” he said.

Subsequently, he suggested that the next monthly CPI indicator due to be released by the ABS on 27 September may show annual inflation beginning with a 5 once again.

In response to the July monthly CPI indicator, Treasurer Jim Chalmers said: “It’s pleasing to see inflation is moderating but we know it will remain higher than we’d like for longer than we’d like.”

“Inflation remains the primary challenge in our economy and that’s why the primary focus of the Albanese government is rolling out billions of dollars in assistance to take some of the edge off cost‑of‑living pressures without adding to inflation.”

The RBA will announce its next rate decision on Tuesday, 5 September. The upcoming meeting will be Philip Lowe’s last as governor, with Michele Bullock taking over from 18 September.

Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.