As it happened: Inflation data far higher than expected ahead of RBA’s next rates call

A few economists have seen enough today to pencil in another rate hike this year.

KPMG chief economist Brendan Rynne says the RBA will need to increase again before Christmas, while Deutsche Bank’s chief Australian economist Phil O’Donaghoe has pencilled in a 25-basis-point hike at the next meeting in September.

We haven’t heard yet from the big four banks’ forecasters, but their reactions will be telling.

Harry Murphy Cruise from Oxford Economics Australia has pointed out that today’s inflation print puts the RBA’s own inflation forecasts at real risk.

“There is a real risk that inflation remains too high and fails to fall in line with the RBA’s – in our view – optimistic forecasts,” he said.

He adds that, with the economy struggling to keep up with demand, the cost of living – and with it interest rates – is unlikely to ease anytime soon.

“Today’s data come a day after the release of notably hawkish minutes from the RBA’s August meeting,” he said.

“Several members raised the prospect that further tightening could be required, with the board stressing that capacity constraints remain despite some cooling in demand.

“The mammoth pipeline of data centre construction risks adding to those pressures, which could keep inflation and interest rates elevated for longer.”

If you’ve got a mortgage, you may want to close your eyes and skip over this post.Josh Gilbert, an analyst at investment platform eToro, says another rate hike is now a live possibility.

“Inflation has not played ball this month, and that puts a rate hike before year-end firmly back on the table,” he said.He’s pointed to the monthly trimmed mean figure as a real red flag.“[That] is the number that will worry Michele Bullock,” he said.“It suggests underlying price pressures are not easing quickly enough, despite three rate hikes this year and a labour market that is beginning to soften.”He’s also pointed out interest rate expectations are “only heading one way today” (no prizes for guessing which way that is), and that Bullock has repeatedly warned the RBA will hike again if needed.But he’s also offered a small olive branch for nervous borrowers.“One hotter print does not make another hike inevitable, particularly with unemployment rising to 4.5 per cent,” he said.“The labour market is loosening in the way the RBA wanted, and this is a board that has shown it would rather sit on its hands and wait for the quarterly read than move off a single monthly indicator.”

We’re starting to get a bit of analysis from commentators and economists.

Let’s start with 9News finance editor Chris Kohler, who said the inflation result is “a little bit high” for the RBA’s liking.

“The trimmed mean inflation number… is probably going to be a little bit uncomfortable for the Reserve Bank,” he said.

“It is above what they were expecting, above what the market and economists were expecting.”

Wee Khoon Chong, BNY’s senior Asia-Pacific market strategist, said while the figures aren’t good, they’re unlikely to force the RBA to hand down what would be a fourth rate hike of the year on September 29.

“Australia’s July CPI remained sticky,” he said.

“The data reinforce upside inflation risks and are likely to outweigh last week’s softer employment report.

“However, the CPI print alone is unlikely to trigger a policy response at the September meeting.

“We expect the RBA to maintain that policy remains ‘somewhat restrictive’, while reiterating upside inflation risks and its readiness to act if needed.”

So what’s caused inflation to come in higher than expected?

Well, housing costs were a chief culprit.

“Housing rose by 5.0 per cent in the 12 months to July due to rising costs for New dwellings,” ABS head of price statistics Rachael McCririck said.

“New dwellings prices rose 5.7 per cent in the 12 months to July as builders passed on higher costs for materials and labour.”

It also appears consumers have been enjoying dining out recently.

Annual food inflation is at 3.2 per cent for the 12 months to July, driven primarily by meals out and takeaway – that measure was up 4.5 per cent.

And, in news that will come as no surprise to anyone who’s had to fill up the car in the last two months, petrol is also getting more expensive.

“On a monthly basis, Automotive fuel prices rose 7.5 per cent in July after falling for three months in a row,” McCririck said.

“This was driven by higher world oil prices and the partial unwinding of the federal government’s fuel excise relief measures in July.”

While we tend to focus on inflation figures for the last year, the month-to-month data is worth paying some attention to today.

And not for the right reasons.

Headline inflation rose 1 per cent from June to July. That number can be quite volatile, but it is the highest it’s been since March.

Of more concern is the monthly underlying figures; the trimmed mean rose 0.5 per cent. If that was repeated for an entire year, it would smash through the roof of the RBA’s 2-3 per cent target.

It’s a similar story with other measures of underlying inflation. The CPI excluding volatile items and holiday travel, for example, was up 0.8 per cent in the last month.

The inflation figures are in, and it’s not great news.

While headline CPI has eased from 3.8 to 3.5 per cent, that’s significantly higher than the 3.2 per cent economists had expected.

The underlying trimmed mean figure is also higher than forecast, staying steady at 3.6 per cent.

Both numbers remain well outside the RBA’s 2-3 per cent target.

So why the expected inflation slowdown?

Here’s Commonwealth Bank senior economist Trent Saunders to explain.

Basically, it comes down to easing energy prices, although a few other bits and pieces will do their best to upset forecasts.

“Electricity, water and automotive fuel will be among the largest influences on the July headline result,” Saunders said in a note late last week.

“Electricity prices are expected to fall by around 2.6 per cent in July.

“The annual reset in regulated and reference Default Market Offer (DMO) prices included sizeable reductions in NSW and south-east Queensland, partly offset by higher prices in South Australia.

“The monthly fall, together with a large base effect from July last year, should see annual electricity inflation decline sharply from 22.4 per cent in June to around 5.1 per cent in July.”

That “large base effect” he refers to is the end of state and federal-based energy rebates, which came into effect last July, causing headline power prices to surge.

“Lower electricity prices will be partly offset by increases elsewhere in the basket,” Saunders added.

“Water and sewerage charges are expected to rise by around 4.2 per cent in July, reflecting the annual reset in regulated prices across several capital cities.

“Automotive fuel prices are expected to increase by around 6 per cent in July, reflecting both higher wholesale fuel prices and the first stage of the unwind in the temporary reduction in fuel excise.”

So, in short, electricity, oil, water, and sewerage. A charming cocktail.

Last month’s figures were a surprise – a positive one, thankfully – as both headline CPI (3.8 per cent for the 12 months to June) and the underlying trimmed mean (3.6 per cent) both came in lower than expected.

That pleasant aberration was a big reason why the RBA was able to leave interest rates on hold at its last meeting a couple of weeks ago.

Today, we’re expecting more good news: headline inflation is forecast to ease significantly to around 3.2 per cent – some economists, including those at Westpac, are predicting a slightly higher 3.3 per cent.

The trimmed mean is expected to slow as well, albeit more moderately, to 3.5 per cent.

This is a bit of a double-edged sword though.

While lower inflation expectations are undoubtedly good for the economy, and point to another rate increase being less likely, if the official figures come in higher than those forecasts, that will increase pressure on the RBA to hike once again.