Australian CPI 3.5% in July

Australia's latest inflation report surprised to the upside of expectations in July, with the partial unwind of the federal fuel excise tax cut playing a key role. Headline inflation rose 1% in July, above the 0.8% lift forecast after cooling over May (-0.7%) and June (-0.1%). Base effects, however, saw the annual rate slow from 3.8% to 3.5%, a low since last November. Underlying or trimmed mean inflation rising 0.5% in July held the annual pace unchanged at 3.6%, remaining elevated to the RBA's target band. Although markets still expect the RBA to hold in September, the odds of a rate hike have been repriced to about a 35% chance. 

Headline inflation picked up in July, lifting slightly more than expected by 1% month-on-month. The federal excise tax cut was halved from its earlier reduction in July, with fuel prices rising by 7.5% in the month. That followed a 27% fall in fuel prices over the 3 months to June. Another key factor was a 6.2% rise in domestic holiday travel costs due to increased demand during the mid-year school holidays. Increases across a range of household services (0.5%) and housing-related costs (0.4%) were the other main contributors to the rebound in inflation.    

Over the past year, housing (5%) has been the major driver of inflationary pressures. Electricity prices (6.1%) have risen after state government rebates unwound, while dwelling construction costs (5.7%) have lifted as builders have passed through higher materials and labour costs. Meanwhile, rents have increased solidly (3.6%) as have council rates and charges (6.2%).

Underlying inflation in July lifted by 0.5% in the month, its fastest rise in 12 months. That kept the annual pace at an unchanged 3.6% to be at highs since 2024. The RBA's view is that with underlying inflation sitting above the target band, there are capacity pressures in the economy at play, partly emanating from the long period of weak productivity growth. These themes were reiterated in the August meeting minutes published yesterday, which indicated the Board was open to further cash rate tightening. 

Macro (Re)View (21/8) | Markets skeptical on Treasury plans

US equities snapped a run of three straight weekly gains, declining by their most since mid July. Fiscal sustainability concerns increased after the US Treasury announced plans to significantly increase its buyback operations of longer-dated bonds. The benchmark US 10 and 30-year yields, both at elevated levels, ended the week higher. Signs of these concerns spilling into the FX market were evident as the US dollar softened this week (-0.8%). 

Australian labour market data this week looks to support the RBA remaining on hold, though next week's inflation report will likely be given more weight by the central bank. Employment fell by 15.8k in July, lifting the unemployment rate from 4.4% to 4.5%. These were downside surprises on expectations for modest jobs growth (12k) and a steady unemployment rate (4.4%). However, as noted in my review (see here), the higher unemployment rate was due to rounding effects, while employment growth was still tracking at a solid pace with gains averaging around 34k per month over the past 3 months. 

The RBA has stressed not overly interpreting volatile labour market data and only last week reaffirmed its view that the overall balance of conditions remained tight - despite revising up its outlook for the unemployment rate. Meanwhile, wages growth held steady at a 3.2% annual pace in the June quarter, broadly in line with RBA forecasts (see here). Private sector wages growth eased to a 4-year low (3.1%), continuing to be outpaced by the public sector (3.4%). 

Focus around the Treasury's buyback plans overshadowed events in the US. The minutes of the Fed's July meeting expressed caution, reflecting the split 9-3 decision to hold rates steady. Inflation risks are seen as 'skewed to the upside' and that 'many participants' expected policy tightening would be required unless inflation declined. Also gaining attention was the fact that Chair Warsh was exploring reducing the number of policy meetings from 8 to 6 per year.   

In the UK, markets continue to price a BoE rate hike by year-end, though the data makes a case against it. The single month unemployment rate was 5.4% in June, a high since late 2020, while the more stable 3-month measure held at 4.9% against expectations to decline to 4.8%. Meanwhile, wages growth for the 3 months through June eased to a 4.1% annualised pace, softening from a prior 4.4%. Higher energy prices saw headline CPI lift from 2.6% to 2.9%yr in June, in line with forecasts. Core CPI was unchanged at 2.6%yr but services inflation - the key part of the basket for the BoE - slowed from 3.6% to 3.4%yr.  

Australian employment -15.8k in July; unemployment rate 4.5%

Australia's unemployment rate printed at 4.5% in today's Labour Force Survey for July, rounding up from 4.4% in June. It was expected to hold at 4.4%, but employment surprised to the downside falling by 15.8k against the 12k rise forecast by markets. The unemployment rate has risen a little faster than the RBA was expecting and that prompted an upward revision to its forecasts in the recent Statement on Monetary Policy. Despite this, the RBA retains a hawkish tilt vowing that rates may still rise. The consensus view among forecasters is that the tightening cycle has reached its conclusion, but market pricing implies a roughly 50/50 chance of the RBA hiking rates for a 4th time this year. 

Employment declined by almost 16k in July as weakness in the part time segment (-32.2k) overwhelmed a rise from full time (16.3k). However, that came after employment rose strongly in May (38.2k) and June (80.2k). That leaves the 3-month average for employment at a respectable 34.2k, its highest since February boosted by those earlier gains.    

The unemployment rate registered at 4.5% rising from 4.4% in June. But the move was marginal upon closer inspection. In June the unemployment rate was 4.43% and in July it came in at 4.46%, so in the prior month it rounded down to 4.4% and then in today's report it rounded up to 4.5%. 

Despite employment falling by 15.8k, the total number of unemployed workers only increased by 4.2k because the labour force declined by 11.2k. That was reflected in the participation rate falling from 67% to 66.9%. 

The broader underemployment rate printed at 6.4%, though total underutilisation rounded down to 10.8% from 10.9% in June - neither movement significant in an overall assessment of conditions. The labour market has loosened slightly since the start of the year but the RBA still judges the overall balance as tight. Wages growth in yesterday's update reported no change in the annual pace at 3.2%, which is broadly in line with the RBA's forecasts (see here).  

In another volatile result, hours worked declined by 0.6% in July to be near-flat over the year (0.2%). Hours worked rose by around 0.4% over the June quarter, so this was a soft start to the September quarter; however, these readings have swung sharply from month to month in recent times. 

Preview: Labour Force Survey — July

Australia's monthly labour force report for July is out this morning (1130 AEST). Although employment is expected to moderate following a solid rise over the previous quarter, the consensus forecast is for the unemployment rate to hold at 4.4%. The RBA has kept rates on hold since May but maintains the labour market is still relatively tight - despite raising its outlook for the unemployment rate following recent data. Market-implied pricing for one further rate hike this year is around 50%.  

July preview: Does unemployment rise? 

Employment is expected to moderate to a 13.5k rise in July after accelerating by 76.3k last time out in June. Estimates for the print cover a wide dispersion ranging from -15k on the low side to +25k top side. Expectations for the unemployment rate are set for an unchanged 4.4% (range: 4.3-4.5%). However, the unemployment rate could face some upside pressure if employment was to cool as expected and labour force participation increases.    

June recap: Employment accelerates holding unemployment at 4.4% 

Employment surged to a 76.3k rise in June, a strong upside outcome on consensus (15k) and the largest increase since April last year. That came after a 44k lift in May. The June result was partly driven by a larger-than-usual number of people who were attached to a new job in May but were yet to start work. The part-time segment was the key contributor with a 47k rise but full time employment also increased by 29.3k. 

On the strength of employment growth in June, the unemployment rate held steady at 4.4% even as the participation rate increased from 66.7% t0 67%, an 11-month high. However, with the underemployment rate rising from 6.3% to 6.5%, labour force underutilisation lifted from 10.7% to 10.9% to be at its highest since late 2021. 

Australian Q2 Wage Price Index 0.8%; 3.2%yr

Australian wages growth maintained a steady pace in the June quarter rising by 0.8% and 3.2% in annual terms, in line with expectations and around RBA forecasts. Scheduled increases under enterprise agreements drove wages growth in the public sector (0.9%q/q, 3.4%Y/Y), again outpacing the private sector (0.7%q/q, 3.1%Y/Y). Although the unemployment rate has risen a little since the start of the year, wages growth has been unaffected. If anything, wages growth is more likely to rise following the Fair Work Commission's review decision to lift award rates by 4.75%, a larger-than-expected increase; however, that does not come into effect until the start of the next quarter.

The structure of the labour market sees wages growth receive a bump in the September quarter, the first quarter of the new financial year as increases to the minimum wage and awards and private sector reviews come into effect. In the intervening quarters, wages growth tends to see little change. 

That was the case in today's report as wages growth recorded its 5th consecutive quarterly increase of 0.8%. The annual pace was steady at 3.2%, down slightly from its pace a year ago (3.4%) but well below cycle highs (4.3%) in late 2023. In 3- and 6-month annualised terms, wages growth remained in the 3.2-3.3% range.      

Beneath the surface, wages in almost 80% of jobs is now rising at a pace below 4%, the largest share in 4 years. That has seen the share of jobs with wage rises above 6% falling to its lowest since mid 2022. At the other end of the spectrum, around 4% of jobs are seeing a wage cut. 

In the private sector, wages growth eased slightly to 0.7% in the quarter from 0.8% previously. That saw the annual pace slow from 3.2% to 3.1%, its weakest pace in 4 years. However, it is diffciult to read too much into that given the ABS reported only 10% of jobs saw a wage change in the June quarter. 

As mentioned above, that will rise significantly in the next quarter as the award increase flows through and the data captures end-of-financial year wage reviews. As it stands though, for those jobs that saw a wage change, the average increase was 3.9%. That is unchanged from a year earlier but materially slower than at its peak of almost 6% in 2023. Wage increases have cooled alongside slowing inflation, while it also reflects reduced tightness in the labour market. 

It is slightly a different story in the public sector. That sector is typically less exposed to changes in underlying labour market conditions, while new agreements take time to implement and have often been playing catch-up to inflation in past years. New agreements at the state and commonwealth levels boosted public sector wages growth to 0.9% in the June quarter, sustaining a 3.4% year-on-year pace. Annual wages growth in the public sector has outpaced the private sector since early last year.

Macro (Re)View (14/8) | Markets avoid US inflation surprise

Modest gains were post by US equities this week, leaving Asia to stand out where South Korea's KOSPI broke clear of its run of outs to rise more than 11% driven by AI-related stocks. The key data point of the week saw US inflation match expectations, prompting a further reduction of Fed rate hike expectations. There were mixed reactions for FX and bonds. The USD held broadly flat over the week, while yields at the front end of the curve declined slightly but lifted at the longer end as concerns over fiscal pressures remained in focus. 

In Australia, the RBA left the cash rate at 4.35% this week as all 9 policymakers supported a hawkish hold. Rates continue to be judged as 'somewhat restrictive', reinforced by recent data on the labour market and inflation that came in weaker than the RBA was expecting and a cooling housing market (see here). Meanwhile, uncertainty in the Gulf was another reason cited to keep watching developments. Reflecting the data, the inflation outlook in the near term was lowered in the August Statement on Monetary Policy. 

That was taken in some quarters as a signal that the RBA may not tighten again this cycle; however, inflation is still not projected to return to the midpoint of the target band until early 2028 and Governor Bullock said the Board judged the risks were to the upside. Market pricing puts the odds of another hike by year-end at around 50/50. For more on this week's RBA meeting please see my review here.

US rates pricing for a Fed hike this year were wound back further to around a 33% chance as inflation data behaved following last week's soft labour market data. Inflation in July matched expectations printing at 0.1%m/m/3.4%Y/Y on a headline basis and 0.2%m/m/2.5%Y/Y on a core basis. In addition to avoiding an upside surprise, the report also showed an easing in the pace of services inflation (3.1%) and in housing-related components. In addition to producer price data, forecasts project the core PCE deflator - the key inflation gauge for the Fed - to come in at 0.2%m/m/3.3%Y/Y in July.

Australian housing finance slows in Q2

Higher interest rates and recent tax changes weighed on the Australian mortgage market in the June quarter, with lending and loan volumes falling by more than 5%. This also followed declines in the March quarter. So far this year the housing market has had to contend with three RBA rate hikes as well as the federal budget that included changes to the tax treatment of capital gains and negative gearing. According to Cotality, housing prices nationally fell by 1.9% over the three months to July - but that only pares back their rise over the past year to around 5%, leaving the median price at just below $930k.  

Housing finance demand continued to slow in the June quarter after easing earlier in the year. Since reaching record highs at the end of 2025, lending commitments have gone on to fall by 8.3% across the first half of this year, incorporating a 5.2% fall in the June quarter. Nonetheless that still leaves the current value of lending ($97.6bn) up 6.8% on a year earlier, an increase that was supported by RBA rate cuts in 2025. 

The brunt of the slowdown has been in the investor segment. The value of those loans was off by 10.2% in the latest quarter ($37.1bn) and fell by 13% through the first half. As it stands, the tax changes to negative gearing and capital gains discount have had a far larger impact on this segment than rate hikes. By comparison, owner-occupier lending was down 5.2% in the June quarter and 8.4% overall in the first half, with rate hikes and affordability pressures likely to be the more impactful headwinds.  

All that said, the tax changes in the budget have been aimed at incentivising investors to add to supply by advantaging new builds, which will still be able to be negatively geared. Accordingly, construction-related lending (construction of new homes and purchase of newly completed homes) to investors was up by more than 6% in the June quarter. That compares to a near 13% fall in investor lending for existing homes.  

Loan volumes have taken a hit as higher interest rates have slowed growth in loan books. In the June quarter, loan volumes fell by 5.4% as they unwound back to levels seen a year earlier (134.2k). Again, the slowdown was more prominent in the investor segment, down 8.6% to 52.6k, whereas owner-occupier loans declined 3.3% to 81.6k. Total demand fell by 9.4% in the first half of this year (investors -12.9% and owner-occupiers -6.9%) - a complete reversal of its 10.4% rise in the back half of last year when rate cuts were a key support. 

RBA stays on hold in August

The RBA left the cash rate unchanged at 4.35% at today's meeting. The decision was again unanimous (9-0) and the Monetary Policy Board retained its hawkish bias, vowing to hike rates further if inflation fails to slow in line with its forecasts to return to the midpoint of the 2-3% target band by around the end of next year. Market pricing was little changed following the meeting, still implying a roughly 50/50 chance of the RBA hiking once more this year.    

Today's meeting contained few surprises after recent inflation and labour market was cooler than the RBA expected. In the June quarter, inflation was 3.9% in headline terms and 3.6% on a core basis, while the unemployment rate lifted to 4.4%. This led the RBA to lower its inflation forecasts this year in its latest Statement on Monetary Policy to 3.6% headline and 3.3% core, down from 4% and 3.5% respectively. However, inflation still isn't seen returning to target until late 2027 at the earliest - partly because market expectations for the cash rate are now lower than they were when they were plugged into the previous set of forecasts back in May. Meanwhile, the unemployment rate is now projected to gradually rise to a slightly higher peak of 4.8% over the next couple of years.

The tone from Governor Bullock at the post-meeting press conference was cautious, saying the discussion among policymakers was around monitoring the data to ensure inflation remained on track to come back to target. Tighter financial conditions following the RBA's three earlier rate hikes were working to slow demand - most notably in the housing market - but there were upside risks to the inflation outlook. In the Gulf, global oil supply remains disrupted and attempts to achieve a resolution have been found wanting. Domestically, the key concern is that productivity is too weak to sustain growth around its current pace (2.5%) without generating inflationary pressures. The next RBA monetary policy meeting is on 28-29 September.