Inflation numbers suggest no rate cut this year

Market economists have digested the latest inflation data and are predicting that the Reserve Bank will leave rates on hold for the remainder of this year, with cuts not expected until around the second quarter of 2025.

HSBC set the tone noting that the headline Consumer Price Index indicator had risen by 3.5% year on year in July, which was above market expectations and those of HSBC itself.

However, it said that tis needed to be discounted because of the widely expected impact of the Government’s recent cost of living relief in lowering electricity prices and therefore the headline rate of inflation in the quarter.

“In July, the Australian Bureau of Statistics noted that government policy measures, particularly in Western Australia, Queensland and Tasmania, saw a 6.4% month-on-month fall in electricity prices, which would have risen by 0.9% month-on-month if not for the policy changes. This story is likely to be echoed from August, too, when the other states received their support,” the HSBC analysis said.

“As the RBA made clear in its recent statement of monetary policy, the underlying measures of inflation are the most important for the monetary policy outlook, particularly in Q3 given that the RBA expects government policies to lower annual headline inflation by 0.75ppts below the trimmed mean, before a rebound in 2025 as the policies unwind.

“The indicators of underlying inflation in today’s print, which are also volatile and partial, highlight that the gradual disinflation process that has been underway for some time is continuing. The monthly trimmed mean CPI indicator has been notably volatile in recent months, but eased to 3.8% y-o-y in July. Similarly, the monthly CPI excluding volatile items and travel indicator eased to 3.7% y-o-y. Both indicators suggest underlying inflation is easing slowly, but is still well above the mid-point of the RBA’s 2-3% target band,” it said..

“Another feature worth considering from today’s print is the shifting basket of the monthly CPI indicator. This month – month 1 in the quarter – captures fewer services prices in the basket compared to month 2 and month 3 in each quarter. Services prices have generally been stickier than goods. Food and clothing and footwear prices both rebounded in the month, and gas prices increased strongly, alongside strength in rents and dwelling costs, though lower oil prices also factored into the month.”

“In short, underlying inflation is too high and only gradually easing, and the jobs market is still tight and only gradually loosening (mostly from the supply-side, with employment still strong). Indeed, underlying inflation is still noticeably higher in Australia than in other comparable economies where the respective central banks have either cut or given guidance that a cut is coming. The recent data, and communications from the RBA, given good reason to think that Australia and the RBA are different.’

“Our central case sees the RBA on hold in 2024, with cuts not arriving until Q2 2025.”