The Australian dollar was lower after the data, as the softer-than-expected monthly trimmed mean reading was seen as the more encouraging signal for inflation. The market is pricing only around a 25% chance of a November hike, well below Westpac's stated base case that the RBA follows up next month, which suggests the market does not see another move as urgent. The risk for the currency is that fuel costs keep pressure on prices, since headline inflation at 4.0% and trimmed mean at 3.6% both sit well above the RBA's 2% to 3% target band. Diesel prices are the key watch point given how widely it feeds through the economy.
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Background:
- Australia CPI preview: headline inflation seen at 4.0% after RBA hike
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Australian headline inflation hit 4.0% on fuel costs as forecast, but softer monthly core inflation took some heat out of the case for a quick follow-up RBA hike.
Summary:
- Headline CPI rose 4.0% y/y in August, in line with the forecast and up from 3.5%, with surging fuel prices lifting the annual rate.
- Monthly CPI rose 0.4% versus 1.0% in July, with forecasts of 0.4% to 0.5% depending on the survey.
- Trimmed mean, the RBA's preferred gauge of underlying inflation, rose 0.2% m/m against a forecast of 0.3% and a prior of 0.5%.
- Trimmed mean was unchanged at 3.6% y/y, in line with forecasts and well above the 2% to 3% target band.
- Fuel prices jumped, partly offset by falls in clothing and travel, according to Reuters.
- The Australian dollar was lower, and the market is pricing around a 25% chance of an RBA hike in November.
Australian consumer price inflation accelerated to 4.0% in August, in line with forecasts, as surging fuel prices outweighed falls in clothing and travel, while a softer monthly reading for underlying inflation eased some of the pressure for a rapid follow-up interest rate rise. Data from the Australian Bureau of Statistics on Wednesday showed the annual CPI rate rose from 3.5% in July. On a monthly basis, prices rose 0.4% after July's 1.0% jump, which was in line with a forecast of 0.4% in some surveys and just under a Reuters consensus of 0.5%.
The trimmed mean measure, which strips out the most volatile price moves and is the gauge closely watched by the Reserve Bank of Australia, rose 0.2% in the month, below the 0.3% forecast and well under July's 0.5%. The annual pace was unchanged at 3.6%, matching expectations. The monthly undershoot was seen as the more encouraging outcome because, unlike the headline rate, underlying inflation was not lifted by fuel costs.
Even so, both measures remain well above the RBA's 2% to 3% target band, with headline inflation at 4.0% the higher of the two. Persistent high fuel costs, in particular for diesel which underpins much of the economy, raise the risk of more widespread price pressures, which suggests the central bank still has work to do.
The RBA raised its cash rate by 25 basis points to 4.6% on Tuesday in anticipation of a high inflation result and left the door open to further tightening if needed. Westpac has said it sees a further hike in November as the base case unless the Middle East conflict is resolved or energy costs fall significantly. Market pricing is less convinced, implying only around a 25% chance of a November move, which points to a view that the next rise is not urgent. The Australian dollar was lower after the data.
The next tests for the RBA will be how fuel prices behave and whether the underlying gauge continues to moderate on a monthly basis. Another soft trimmed mean reading would likely strengthen the case for patience, while any renewed spike in fuel could support the argument for acting again sooner.
Reserve Bank of Australia Governor Bullock
This article was written by Eamonn Sheridan at investinglive.com.