Perhaps the most important data release in more than two years will land on Wednesday, with the Australian Bureau of Statistics releasing the June quarter inflation figures.
Here’s why the consumer price index (CPI) and other inflation numbers are being more closely watched since the Reserve Bank of Australia started hoisting interest rates in May 2022 and what the results might mean.
Why is this data batch so important?
The RBA wants inflation back within a 2-3% target range by the end of 2025 and the June quarter data might reveal a stalling of that trajectory.
If so, the central bank may decide hiking interest rates is needed to ensure inflation resumes its retreat.
After the RBA’s most recent board meeting in June, the bank’s governor, Michele Bullock, said the central bank was “vigilant” in watching for proof that inflation wasn’t receding fast enough.
But Australia’s in “quite a complex situation”, Bullock said. Pundits demanding another rate hike – it’s been 4.35% since last November – were “much more definite” than she was but “it’s not as easy as that”.
ABS figures since then, including May’s monthly CPI reading that rose to 4% for the first time in 2024, have helped make things clearer. The jobless rate also nudged up to 4.1% in June, even as the economy added more than 50,000.
The ABS only surveys price changes each month for part of the 87 categories of goods and services that make up the basket. That’s why the RBA treats them “with a bargepole” (as one former senior economist put it), viewing the quarterly numbers as more comprehensive.
What’s expected?
In May, the RBA forecast June quarter inflation would be 3.8% for both the so-called headline CPI and the trimmed mean. The latter strips away 15% from the top and bottom of the most volatile price movers to approximate “core” inflation.
In the March quarter, CPI and trimmed mean were 3.6% and 4%, respectively. Both have been sinking since scaling three-decade peaks of 7.8% and 6.8% at the end of 2022.
Private economists reckon the June quarter CPI will match the RBA’s prediction but the core reading will remain steady at 4%, according to Bloomberg.
If that’s the outcome, investors will probably lift the odds of an interest rate rise to 4.6% – which are now about a one-in-five chance – when the RBA board meets next week.
All four major commercial banks currently expect the next RBA move will be a rate cut.
Are governments making the RBA’s job easier or harder?
Governments are tending to stoke demand rather than chill it, such as the Albanese government’s stage-three tax cuts that will inject about $23bn into the economy this year, or hefty (extra) energy rebates by Labor counterparts in Queensland and Western Australia.
All three have to go to elections within the next 10 months and can’t ignore voters’ pleas for help to deal with cost of living increases. Some of the support, though, will go to (mostly older, mortgage-free) people who need it less.
Treasurers and their Treasuries, though, argue the economy would have stalled without these injections. The other half of the RBA’s mandate is to secure full employment and it doesn’t want to send households and businesses to the wall if it can avoid it.
The RBA’s models already anticipate a spending jump will follow tax cuts. It also seems to have accepted Treasury arguments rebates serve to “mechanically” lower CPI, and in the process reduce demand in the economy buy cutting CPI-indexed payments such as pensions.
“Energy rebates and rent assistance would lower headline inflation in 2024, though this direct effect would be reversed later in 2025 [should the rebates not be extended],” the RBA said in its June meeting minutes.
Economists such as Steven Hamilton are sceptical. “By lowering prices, the energy rebate increases households’ real incomes, boosting aggregate demand and inflation,” he wrote in the AFR in May.
The RBA will update its assessment of budget inflationary effects for its August meeting including, presumably, some early hint of how much of those tax cuts are getting spent.
What are central banks overseas doing?
Those calling for another interest rate rise argue that Australia was relatively slow to start hiking our cash rate and it hasn’t risen as much as peers abroad.
That might be technically true but the RBA’s twin mandate and the fact its inflation target is lower than the US or New Zealand with their 2% or lower goals allows it to be more flexible and patient.
There is also proof Australia’s treatment of housing costs has stoked the CPI inflation measure here while moderating it in nations such as the US, Canada and the UK.
As it happens, overseas counterparts have lately shifted to cutting rates or will do so soon. Canada lowered its key interest rate in June and July, the European Central Bank cut in June and the US Federal Reserve is widely expected to start reducing rates in September.
Falling overseas borrowing costs would take some of the pressure off the RBA to hike again if the Australian dollar strengthens, making imports cheaper.
What are wild cards to watch?
Core inflation may be the RBA’s primary focus but the central bank won’t ignore what headline CPI numbers do to inflationary expectations of households and businesses alike.
Housing makes up about 21.75% of the CPI basket, of which rents account for about six percentage points and the cost of new houses just over eight percentage points.
The tight housing market in most capital cities and labour shortages suggest this component of inflation won’t ease much any time soon.
Despite heightened media attention, electricity is 2.36% of the basket, with gas accounting for just under 1%. By contrast, transport fuel at almost 3.75%, garners much less attention.
Some service price increases will also remain elevated, with insurance costs rising 3% in the June quarter alone, the Commonwealth Bank has noted. That’s down at least from 3.7% in the March quarter, but suggests the sector will continue to be a propellant for price increases.
Some food prices are also rebounding. Volatile food and vegetable prices may increase as much as 7% for the quarter, led by lamb, the bank forecasts.
Much to chew on, in other words.
