July inflation beats forecasts, stoking fears of fourth RBA rate hike
The Australian Bureau of Statistics reported that the Consumer Price Index rose by 3.5% in July, exceeding the 3.3% forecast. The Reserve Bank of Australia’s preferred underlying inflation measure remained at 3.6%, increasing the likelihood of a fourth interest rate hike this year, potentially as early as September, to meet the 2.5% inflation target.
Inflation in Australia proved stickier than anticipated, with the Australian Bureau of Statistics reporting that the Consumer Price Index rose by 3.5% in July. The figure exceeded the 3.3% forecast by economists, although it represented a decline from the 3.8% recorded in the previous month. The result has intensified speculation that the Reserve Bank of Australia (RBA) will implement a fourth interest rate increase this year to bring price growth back in line with its 2.5% target.
The RBA’s preferred underlying inflation measure, which strips out volatile prices, remained unchanged at 3.6% rather than moderating as many had expected. This persistence in core inflation has led several analysts to revise their outlooks. Phil O’Donaghoe, chief economist at Deutsche Bank, stated that he now expects the RBA to move as early as the next meeting in September, describing the underlying price growth as “intolerably high.”
The data arrives just days after the RBA held the cash rate at 4.35% on 11 August in a unanimous decision. Minutes from that meeting revealed that board members were unconvinced they would hit the 2.5% inflation target by the end of next year. Several members had previously noted that another rate hike this year was “quite possible,” a view now supported by the latest statistics.
Brendan Rynne, chief economist at KPMG, commented that the data supports the view that without policy action, the economy may face a “long, costly grind” to get inflation under control. He suggested the RBA may have missed an opportunity at the last board meeting to get ahead of the game by raising rates. NAB analysts also declared that their previous call for no further rate hikes was “under review,” while other economists have heightened the chance of a November hike.
Key drivers of the July inflation print included a 7.5% increase in fuel prices following the end of fuel excise relief. Home building costs also rose by 5.7% in the year to July, driven by project home builders passing through higher labour and materials costs. Rents increased by 3.6% over the same period, a factor My Bui, an economist at AMP, identified as a chronic issue for the Australian economy.
Additionally, the price of takeaway and restaurant meals climbed by 4.5%. The ABS attributed this rise to higher operating costs, including ingredients and the increase in the minimum wage that took effect on 1 July. While the exact timing of a potential fourth rate hike remains uncertain, with predictions split between September and November, the hawkish signals from the data suggest the RBA has little room to delay action.
