Unexpected Surge in Inflation in Australia, But Rate Cut Expectations Remain Unchanged

The Commonwealth Bank of Australia (CBA) has called for calm following the release of "shocking" inflation data, urging the public not to overreact to short-term fluctuations. According to data from the Australian Bureau of Statistics (ABS), the annual inflation rate for July 2024 surged sharply to 2.8%, up from 1.8% the previous month, marking the highest level since July 2023. This raised concerns in the market about whether the Reserve Bank of Australia (RBA) would continue its interest rate cuts. However, CBA economist Harry Ottley has advised that such short-term data should not prompt an excessive response, noting that these fluctuations are unlikely to change the RBA's planned policy direction.

Impact of Short-Term Fluctuations

The rise in inflation in July was largely due to one-off and seasonal factors. Ottley pointed out that rebates on electricity bills and holiday travel contributed to higher consumer prices. For example, households in New South Wales and the Australian Capital Territory received energy subsidies in July rather than August, leading to increased consumer spending in July. Additionally, seasonal hikes in travel costs were also a factor driving up inflation. While these factors contributed to the short-term spike in inflation, they are expected to stabilize as the spring and summer seasons approach, meaning these increases are unlikely to persist.

Australian Treasurer Jim Chalmers also emphasized that monthly CPI data can be volatile and should not be over-interpreted. He highlighted that quarterly data is more reflective of overall economic trends, and that inflation in Australia has remained below 3% for several months.

Likelihood of Future Rate Cuts

Despite the rise in inflation for July, many economists believe that this will not alter the RBA's plans for continued rate cuts. CBA maintains its forecast that the RBA will likely cut interest rates by 0.25% in November. The RBA's September meeting is unlikely to lead to a rate change, especially after the latest CPI report, as the market widely expects the RBA to adopt a wait-and-see approach, particularly while awaiting the quarterly inflation data in September.

While the July inflation report was "shocking," it does not completely rule out the possibility of further rate cuts by the RBA, especially after the quarterly report is released in November. Russel Chesler, Head of Investments and Capital Markets at VanEck, noted that while the labor market remains strong, the recent rate cut and the volatility in inflation suggest that another rate cut before November is unlikely.

Bank Predictions

According to predictions from major banks, the likelihood of a rate cut in November remains high. Banks such as ANZ, CBA, and National Australia Bank forecast that the RBA could again lower the cash rate by 25 basis points in November, bringing the rate down to between 3.35% and 3.10%. Westpac Bank predicts that the RBA will cut rates in November, followed by another cut in February.

However, Sean Langcake, Head of Macroeconomic Forecasting at Oxford Economics, stated that monthly data is only part of the inflation story. He believes that the quarterly inflation data in September will be more moderate, potentially paving the way for a rate cut in November. As a result, although market expectations for a rate cut in September have significantly reduced, economists still anticipate that the RBA will act in November.

Key Drivers of Inflation

The main drivers of the recent inflation rise are housing, travel, and energy prices. Housing prices increased by 3.6%, while alcohol and tobacco prices rose by 6.5%. Additionally, energy prices saw a significant increase in July, rising 13.1% year-on-year. Particularly in New South Wales and the Australian Capital Territory, the cancellation of some government energy rebates caused households' out-of-pocket expenses to rise sharply, further driving up the cost of living.

Another significant factor was the rise in prices of consumer goods, with the price of coffee, tea, and cocoa increasing by 14.4% over the past 12 months. These factors contributed to the inflationary pressure, although Treasurer Chalmers emphasized that these increases were largely due to volatility and one-off factors.

Market Reaction and Outlook

Following the release of the inflation data, the ASX 200 index dropped by 0.3%, while the Australian dollar gained slightly, rising to 65.05 cents against the US dollar. Despite the rise in inflation, the market did not react too strongly, with some economists suggesting that this fluctuation will not have a significant impact on the overall economy or market.

Overall, despite the surprising inflation report for July, economists generally believe that this data is not enough to derail the RBA's expectations of rate cuts. As seasonal factors subside and future quarterly data is released, Australia's economic policy is likely to continue on a path of rate cuts. A rate cut in November seems almost certain, but whether further cuts will follow will depend on upcoming data and global economic conditions.