Australia inflation runs hot in July, adding to rate hike risk

[SYDNEY] Australian consumer prices rose more than expected in July as fuel and travel costs jumped, data showed on Wednesday (Aug 26), while core inflation also exceeded forecasts and added to the risk of another hike in interest rates.

The Australian dollar rose 0.2 per cent to US$0.7176, while three-year government bond futures reversed an earlier rally to be last down 3 ticks at 95.42.

Market participants nudged up the chance of a fourth rate hike from the Reserve Bank of Australia next month to 36 per cent from 17 per cent, while a move by February next year is now priced at 94 per cent.

After the hot figures, Deutsche Bank is now calling for a quarter-point rate hike from the RBA in September, citing fresh upside risks to inflation.

“We think the July CPI leaves little room for the RBA to do anything other than follow-through on its hawkish posturing, and the earlier it does, the better,” said Phil Odonaghoe, an economist at Deutsche Bank.

Data from the Australian Bureau of Statistics showed its monthly consumer price index (CPI) rose 1.0 per cent in July from June, exceeding forecasts of a 0.8 per cent rise, as fuel prices jumped 7.5 per cent after falling for three months.

The annual pace slowed to 3.5 per cent from 3.8 per cent, countering expectations for a sharp slowdown to 3.3 per cent due to an outsized increase from last year dropping out of the calculation.

The trimmed mean measure of core inflation increased 0.5 per cent in the month, the biggest increase in a year and well above forecasts for 0.3 per cent, leaving the annual pace at 3.6 per cent.

The RBA held interest rates steady at 4.35 per cent this month for a second consecutive meeting after three rate hikes this year aimed at taming inflation. Policymakers have warned that they would hike again if inflation risks build.

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Minutes from the central bank released on Tuesday showed several board members judged it was quite possible the upside inflation risks would materialise, requiring some further tightening. The bank had forecast trimmed mean inflation to slow to 3.3 per cent by the end of the year.

Wednesday’s report showed new dwelling prices jumped 5.7 per cent in July from a year ago, slowing a touch from a 5.8 per cent rise the previous month, as builders passed on higher material and labour costs, the ABS said. Rent inflation held steady at an elevated rate of 3.6 per cent.

Prices for tradeable goods jumped 1.5 per cent thanks to the jump in fuel costs, compared with a drop of 0.8 per cent the previous month.

“There is a real risk that inflation remains too high and fails to fall in line with the RBA’s – in our view – optimistic forecasts,” said Harry Murphy Cruise, head of economic research for Oxford Economics Australia. REUTERS