Australia's CPI inflation report for the June quarter is set to keep the RBA on hold at next week's policy meeting. Markets had factored a rate hike at around a 30% chance, but this has been completely priced out post release as headline CPI matched expectations at 1% quarter-on-quarter and 3.8% year-on-year (up from 3.6% previously), while the key trimmed mean measure (the RBA's preferred gauge of core inflation) was softer than anticipated at 0.8%q/q and 3.9%Y/Y (down from 4%). These outcomes compare to the RBA's May forecasts of 3.8% year-on-year inflation for both headline and core CPI. A hawkish revision to the RBA's outlook for a return to the midpoint of the 2-3% inflation target band in 2026 - the logical threshold for an August hike - looks unlikely after today's report.
The June quarter CPI print showed headline inflation came in at 1% in quarter-on-quarter terms, unchanged from the March quarter. The composition of inflation was slightly more encouraging in the latest quarter as services inflation eased from 1.4%q/q to 1%q/q - though the annual rate firmed from 4.3% to 4.5%, an elevated pace that will remain central in the RBA's justification to maintain a restrictive monetary policy stance. The major contributors to services inflation in Q2 were international holiday travel (8%q/q) amid peak demand for travel during the northern hemisphere summer; rents (2%q/q) reflecting very tight vacancy rates (but moderated by a government assistance scheme); and medical and hospital services (2.1%q/q) as private health insurance premiums rose.
Despite a softer services figure, inflation was held up by a few key factors, mainly in the more volatile items. Prices for fruit (10.6%q/q) and vegetables (3.3%q/q) lifted, driving a higher contribution to inflation from the grocery basket than in Q1. Fuel prices - coming off a 1%q/q fall in Q1 - rebounded to post a 1.7%q/q rise that added almost 0.1ppt to quarterly inflation. Clothing and footwear prices rose (3.1%q/q) following discounting during the March quarter, leading to durable goods pushing up on inflation in Q2. Household utilities (water, energy), which also subtracted from inflation in Q1, swung to a positive contribution this quarter (0.8%q/q).
The overall takeaway from today's report is that there looks to be little basis for the RBA to hawkishly adjust its 2026 timeframe for returning inflation to the midpoint of the target band. The RBA has said it has little tolerance for a timeframe any longer than this, but the risks of that occurring haven't increased on the Q2 CPI numbers. This leaves the Board in a position where it can retain its message of needing to remain vigilant but not needing to hike.
