Australia’s inflation undershoots forecasts, spurring traders to pare RBA hike bets

[SYDNEY] Australian consumer prices rose at a slower pace in the June quarter as fuel costs eased from peaks, while core inflation undershot forecasts and lessened pressure for a further hike in interest rates.

The Australian dollar fell 0.3 per cent to US$0.6953 and 3-year government bond yields declined 10 basis points to 4.482 per cent. Markets pared back the chance of an interest rate increase next month to just 4 per cent, from 21 per cent previously, while a hike this year is priced at 50 per cent.

Data from the Australian Bureau of Statistics out on Wednesday showed its consumer price index (CPI) rose 0.6 per cent in the second quarter from the previous period, after jumping 1.4 per cent in the first quarter. Annual CPI eased to 4.0 per cent from 4.1 per cent.

The key trimmed mean measure of core inflation increased by 0.8 per cent on-quarter, just below forecasts for a 0.9 per cent gain. The annual pace picked up to 3.6 per cent, from 3.5 per cent, but was below market forecasts for 3.7 per cent and the Reserve Bank of Australia’s own forecast of 3.8 per cent.

“All that backs up our view that the RBA will keep rates on hold next month,” said Harry Murphy Cruise, head of economic research for Oxford Economics Australia.

“Underlying inflation is not just resisting pressure to rise; in quarterly terms, it is continuing to ease.”

For June alone, CPI fell 0.1 per cent from the previous month as fuel costs plunged nearly 11 per cent, pulling the annual pace down to 3.8 per cent, though the data has already been overshadowed by a 20 per cent surge in oil prices this month as the US and Iran resumed attacks in the Gulf.

Housing still a source of inflation

The Reserve Bank of Australia has raised the key rate three times this year to 4.35 per cent to tame inflation, fully reversing the amount of policy easing implemented last year. Governor Michele Bullock said on Tuesday it was not clear if rate hikes so far were enough to return inflation to target.

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The labour market also stayed surprisingly resilient, with the economy churning out more jobs in June despite a small pick-up in the unemployment rate.

Wednesday’s report showed higher commodity prices are still flowing through the economy, with new dwelling prices jumping 5.8 per cent in June from a year ago — the fastest pace in almost three years — as builders passed on higher material and labour costs.

Rent inflation held steady at an elevated rate of 3.6 per cent in June. Most of the disinflation came from goods, while services inflation accelerated to 4 per cent in June, from 3.7 per cent the previous month.

“We have broad, domestically driven pressures, not temporary price movements the RBA can easily look through,” said Russel Chesler, VanEck’s head of investments and capital markets. “Housing remains the biggest pressure point.”

“The risk is that the next inflation prints move higher again,” he said. REUTERS