Inflation On Track, RBA To Maintain Course

Today's figures from the Australian Bureau of Statistics (ABS) show a 1.0% increase in the Consumer Price Index (CPI) for the June 2024 quarter, resulting in a 3.8% annual rise, which aligns with market expectations. This is the first uptick in annual CPI inflation since the December 2022 quarter. Additionally, trimmed mean inflation, which smooths out price volatility, rose by 0.8% quarter-on-quarter and 3.9% year-on-year.

This latest inflation print brings a positive outlook. While the Reserve Bank of Australia (RBA) aims to bring headline CPI to its target range of 2%-3%, its prefers to track the trimmed mean measure more closely. Overall, inflation is progressing in line with the RBA’s expectations, strengthening our confidence in the call for a policy hold at the upcoming August 5-6 meeting.

Monetary Policy Implications

The Reserve Bank of Australia (RBA) must feel a great weight has been lifted off its shoulders. Nevertheless, we anticipate the RBA will prefer to be on a watchful hold as it is still too soon to declare victory. We advocate for a pause at next week’s meeting due to the relative persistence of price increases. Remember, the target range is 2%-3%, and headline inflation has risen to 3.8%, which remains uncomfortably high. A rate hike will most certainly be considered at the August meeting. Having said that, we expect the RBA to maintain its current stance until the fourth quarter of 2024, with the first and sole rate cut this year to come in November.

We believe there are two key lessons in this economic cycle that we must accept: normalisation takes time and the stage we are currently at matters. Despite easing inflationary pressures, the central bank aims to carefully manage inflation expectations, mitigating a potential surge in consumer spending, particularly on discretionary items, in response to cost-of-living relief measures. Rebates will play a significant role in easing household expenses in the coming months and the RBA is likely to be wary of this “artificial” disinflation.

While inflation has been the focal point, it's crucial to remember that the RBA has a dual mandate: to tame inflation while "preserving labour gains"—a phrase Governor Bullock often repeats. The real test for RBA's patience is not the slow pace of disinflation but the extremely gentle pace of easing in the labour market. Unemployment rate is inching up ever so slowly while the strength in employment growth has been surprising! Is the labour market really still tight? We don't think so. Hiring intentions are expected to slow in the coming months and an imminent softening in the labour market should ideally complement normalisation in prices. The caveat being, everything is taking its own sweet time, which adds to the discomfort of policymakers.

Hiking rates could curb inflation faster but might also stifle economic recovery and exacerbate weaknesses in certain sectors.  In our opinion, holding rates is the right course of action to allow the labor market to continue its gradual easing, leading inflation to naturally fall to target levels over time. In this delicate balancing act, the RBA will weigh immediate conditions against the inherent strengths and vulnerabilities of the economy.

CPI Movers and Shakers

In the June quarter, housing prices witnessed a notable 1.1% increase, driven by a 1.1% surge in new dwellings purchased by owner occupiers, alongside a 2.0% rise in rents driven by a tight rental market and low vacancy rates. Meanwhile, food and non-alcoholic beverage (1.2%) added to the price pressures, particularly in fruit and vegetables (+6.3%), meals out and take-away food (+0.6%), and meat and seafood (+1.3%). Unfavorable growing conditions led to the highest quarterly rise in fruit and vegetable prices since 2016.

Annually, the CPI rose by 3.8%, showing a slight increase in yearly inflation for both goods and services compared to the March 2024 quarter. Electricity prices were notably 6.0% higher than a year ago, up from 2.0% in the year to March 2024, as out-of-pocket costs increased with the gradual depletion of Energy Bill Relief Fund rebates by some households.

By capital cities, Perth led the charge with prices increasing 2.1% sequentially, driven by a substantial surge of 44.1% in electricity prices. This rise was following the conclusion of the second instalment of the Energy Bill Relief Fund. Adelaide prices grew the second highest with price increases of 1.3% followed by Sydney and Brisbane at 1.0% each.

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