Australian July Inflation Slows Less Than Expected, Heightening Rate Hike Expectations

Consumer price growth in Australia slowed in July but remained above economic forecasts, raising expectations that the country’s central bank may increase interest rates again before the end of the year.

Data published by the Australian Bureau of Statistics shows that the annual consumer price index rose by 3.5 percent in July. While this represents a decrease from the 3.8 percent annual rate recorded in June, it exceeded the 3.3 percent rate that private sector economists had anticipated. Meanwhile, the Reserve Bank of Australia’s preferred measure of underlying inflation, which excludes volatile price movements, remained unchanged at 3.6 percent instead of moderating as anticipated.

The statistical agency noted several key factors driving price growth during the month. Fuel prices increased by 7.5 percent in July after declining for three consecutive months, driven by the conclusion of government fuel excise relief. Housing costs also continued to push overall figures higher. Home construction costs grew by 5.7 percent over the 12 months to July, which the agency attributed to home builders passing along higher expenses for materials and labor. Over the same period, rental prices rose by 3.6 percent.

Additional price pressures emerged in the service sector. The cost of dining out and purchasing takeaway meals increased by 4.5 percent on an annual basis. According to the statistics bureau, these gains reflected higher operating expenses, including ingredient costs and a national minimum wage increase that took effect on July 1.

The unexpected persistence of inflation has prompted financial analysts to adjust their interest rate projections. Analysts at National Australia Bank noted their forecast of no further rate increases was “under review.” Phil O’Donaghoe, chief economist at Deutsche Bank, described underlying price growth as “intolerably high.” He said the data leaves “little room for the RBA to do anything other than follow through” on its stance, predicting a rate increase as early as September.

Other economists foresaw potential increases later in the year. My Bui, an economist at AMP, observed that “housing remains Australia’s chronic issue” and maintained a prediction for a November rate increase, while noting “a September hike is certainly plausible.” Brendan Rynne, chief economist at KPMG, warned of “a long, costly grind to get inflation under control” without central bank action. He added that the board “may have missed an opportunity” at its previous meeting to raise rates early.

Background

The Reserve Bank of Australia (RBA) maintains an official policy target to keep annual inflation between 2 and 3 percent, with a specific goal of reaching 2.5 percent. On August 11, the central bank’s board voted unanimously to keep its benchmark cash rate at 4.35 percent. However, official board minutes released recently indicated that members were uncertain whether inflation would return to the target level by the end of next year. The minutes noted that several board members considered an additional interest rate increase later this year to be quite possible if price pressures failed to ease as projected.