Australian CPI Figures Show Softening Inflation, RBA Rate Hike Likely
The Australian Consumer Price Index (CPI) figures for the second quarter of the year have been released, indicating a softening in inflation. Economists and researchers from seven major banks have provided their forecasts for the upcoming inflation data, shedding light on the current economic climate in Australia.
According to the data, headline inflation has decreased to 5.4% year-on-year in June, compared to 5.6% in May. For the second quarter, headline inflation is expected to be 6.2% YoY, down from the previous release of 7.0%. Similarly, the Trimmed Mean is forecasted to be 6.0% YoY, lower than 6.6% in the first quarter.
These figures suggest that while year-on-year rates are declining, there is little sequential progress in underlying inflation. The details surrounding services also pose a risk to a swift return of inflation to target levels. However, despite these challenges, experts still anticipate a rate hike by the Reserve Bank of Australia (RBA) in the near future.
One forecast expects the RBA to raise the cash rate in August and potentially elevate it to 4.6% in the coming months. This tightening in policy is seen as necessary to boost confidence in achieving the RBA’s mid-2025 target of 3% inflation. Another forecast aligns with this expectation, predicting a pause from the RBA in August instead of an immediate rate hike.
There is consensus among economists that annual inflation peaked in late 2022 and will continue to moderate throughout 2023. However, it is important to note that core inflation remains significantly above the RBA’s target band and is unlikely to return within that range anytime soon.
The CPI release holds significant importance as it will likely determine whether the RBA proceeds with another rate hike in August or chooses to pause. Experts anticipate a decline in headline inflation to 5.4% in June, mainly driven by lower prices in the housing and transport sectors. However, this decline might not be substantial enough to fully support the termination of the RBA’s tightening cycle, leading to expectations of further rate hikes.
Based on these forecasts, the expectation is for Australia’s headline Q2 CPI to decelerate to a 1% increase, resulting in a yearly reading of 6.2%. Underlying CPI is expected to increase by 1.2%, aligning with the pace seen in Q1 and implying a yearly reading of 5.8%. While these figures fall slightly below the RBA’s May forecasts, they still support the argument for at least one 25 bps rate hike from the RBA in August.
In conclusion, the softening inflation revealed in the Australian CPI figures indicates a potential slowdown in the economy. With expectations of further rate hikes from the RBA, it remains to be seen how these measures will impact inflation and the overall economic outlook in Australia.
