Australian inflation firmed in August according to the ABS's monthly indicator. This follows upside surprises in the previous release for July. Annual headline CPI lifted from 2.8% to 3.0%, its fastest reading since July last year. Measures that exclude volatile food, energy and holiday prices also moved up. The data saw the AUDUSD trading 0.3% higher at a level north of 0.66 while the 3-year bond yield rose 6bps to just above 3.5%. The RBA meets next week where the Board is expected to leave rates hold; however, markets are broadly expecting a further 50bps of cuts before the current easing cycle is wound up.
Inflation according to the ABS's monthly series picked up a little in August. Headline CPI rose from 2.8% to 3% in annual terms, above the 2.9% figure expected by markets. This is a very volatile series and as the RBA have essentially made clear by now, it will only move policy having seen the full quarterly data. To highlight an example of this volatility, the one-month change in the CPI was slightly negative at -0.1% but the change over the 3 months to August was a strong 1.1%. The RBA had enough confidence in the inflation trajectory to cut rates at its previous meeting, after the quarterly CPI cooled to a 0.7%q/q, 2.1%Y/Y pace. But the monthly reads through July and August suggest inflation is on track to tick up a bit in Q3 - unlikely by enough to prevent further easing but in a way that reinforces the RBA's gradual approach.
Inflation excluding volatile items (food, energy etc) lifted from a 3.1% to a 3.3%yr pace and a broader measure that also removes holiday travel prices and is seasonally adjusted rose from 3.2% to 3.4%. These were the highest readings for both gauges since July 2024. The trimmed mean - one of the key measures for the RBA in the quarterly release - softened a touch from 2.7% to 2.6%yr. In the monthly data, the RBA tends to place more weight on the seasonally adjusted measure excluding volatile items and holiday travel.
A key driver of the volatility in monthly inflation has been electricity prices. Last month, differences in the timing of when government rebates had been applied in different states saw measured electricity prices rise by 13.5%. This month, however, electricity prices fell by 6.5%, as households in NSW and the ACT moved onto the federal government's extended rebate scheme of $150 paid in equal installments across two quarters. In annual terms, electricity prices soared from 13.6% to 24.6%, due to the effect of very large rebate schemes in WA and Qld falling out of the calculation.
Prices in the housing basket have picked up to a 4.5%yr pace on rising electricity costs; however, at the same time rents, which have a 6.6% weighting in the CPI, are on the slide coming down to 3.7%yr in August, a low since November 2022. New home building costs are running at just a 0.7%yr pace, notwithstanding firmer readings of 0.4% in July and August.
