RBA at a Crossroads: Inflation Decline Eases, Rate Hike Looms


While total inflation in Australia rose as predicted in August, core inflation fell more dramatically than expected. These developments have forced the Fed to consider raising interest rates the following month.

The consumer price index (CPI) for Australia demonstrated a 5.2% annual increase in August, up from the previous month's figure of 4.9%. This marks the first uptick in inflation rates over the past four months. It's essential to note that this upswing was primarily attributable to elevated fuel prices caused by global supply dynamics.

The price metric, which excludes volatile items and travel expenditures, declined from 5.8% to 5.5%.

According to Moody's Analytics economist Harry Murphy Cruise, “inflation's downtrend stumbled in August... But it's too early to say inflation is rearing its head again.”

“Of course, there are plenty of pain points... Rising services inflation also continues to dampen the 'good' news—quickly falling goods inflation. Still, the positives outweigh the negatives,” he added.

Market forecasts for a fourth consecutive Reserve Bank of Australia rise pause have increased from 87% to 92% since the release of the data. Market players are projecting that the next time interest rates go up will be in May of 2024.

"We view the uptick in inflation in August as a temporary hump in the downward trend in train since December last year," commented Stephen Wu, an economist at the Commonwealth Bank of Australia.

He also stressed that the RBA may share this view as well when it makes its rate decision for October next Tuesday.

However, depending on the data contained in the RBA's third-quarter inflation report, some analysts believe the RBA may implement yet another interest rate hike before the year is up, possibly in November.

The Reserve Bank of Australia has already increased rates by 400 basis points since May of the previous year, reaching a peak of 4.1%, which is the highest in 11 years. The central bank has cautioned that another rate hike might be necessary to combat inflation.

The increase in the consumer price index was 0.6% month-over-month in August, which was an acceleration from the 0.3% increase seen in July.

The value of the Australian dollar remained relatively unchanged at about 64 cents, while the yield on the three-year government bond declined three basis points to reach 4.029%.

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