Inflation uptick raises prospects of another rate rise, say economists

A rebound in inflation last month could lead the Reserve Bank to deliver one more interest rate rise before the end of the year.

Core inflation fell less than expected to 5.5 per cent from 5.8 per cent. Picture: Nicki Connolly

A rebound in inflation last month gives upside risk to quarterly inflation forecasts which could lead the Reserve Bank to deliver one more interest rate rise before year end, economists say.

The monthly CPI indicator for August rose 5.2 per cent year on year versus 4.9 per cent in July, in line with market expectations and still well below a peak of 8.4 per cent in December.

But the underlying details were somewhat firmer than economists expected.

Among the most significant price rises, housing rose 6.6 per cent, transport rose 7.4 per cent, food and non-alcoholic beverages gained 4.4 per cent and insurance and financial services rose 8.8 per cent.

Core inflation, which excludes volatile items such as fruit and vegetables, automotive fuel and holiday travel and accommodation, fell less than expected to 5.5 per cent from 5.8 per cent.

Three-month annualised weighted median inflation rose to 5.4 per cent amid a marked pick up in underlying services inflation to 8.6 per cent annualised, with elevated inflation across a range of wage-sensitive items, said Goldman Sachs Australia chief economist Andrew Boak.

“We expect the RBA to remain on hold in October given the noise in the monthly data, with the board under new governor Michele Bullock likely to wait for Australia’s quarterly CPI data on 25 October and updated staff forecasts before hiking in November alongside persistent services inflation,” he said.

HSBC chief economist Paul Bloxham.

The RBA board meets Tuesday, the first led by Ms Bullock.

The central bank left rates on hold at a decade high of 4.10 per cent at its September monetary policy meeting – the last under its former governor Philip Lowe – after an outbreak of inflation led the RBA to start a rapid increase in the cash rate from a record low of 0.1 per cent since May 2022.

The RBA is likely to increase interest rates again by the end of the year, partly reflecting core inflation that is sticky at an elevated level, according to HSBC.

HSBC’s central case has another 25 basis point rate rise pencilled in for the fourth quarter.

“We do not think that this monthly CPI indicator print will be enough to get the RBA over the line to hike at its October meeting next week,” HSBC chief economist Paul Bloxham said.

“Rather, we think the RBA is more likely to wait for the official quarterly CPI on 25 October to get a more comprehensive read, alongside the next labour market print on 19 October 2023.

AMP deputy chief economist Diana Mousina.

“However, today’s inflation print highlights some risks, and we cannot rule out the chance that a rate hike is on the table next week.”

AMP also saw upside risks to inflation increasing the risk of another interest rate rise.

Inflation is clearly still too high at 5.2 per cent year-on-year, according to AMP deputy chief economist Diana Mousina. AMP expects more downside to inflation from here, with headline annual inflation expected to be at the top end of the Reserve Bank’s 2 to 3 per cent target band by mid 2024.

“However, there are more upside risks to inflation currently compared to a few months ago, as commodity prices, especially food and oil, are rising and as recent outcomes from Australia’s enterprise bargaining agreements show some upside wage risks.”

In her view that increases the risk of another rate rise before the end of the year, with the most likely timing for another rate rise in December, after the September quarter wage figures.

But for now, AMP expects the RBA to keep the cash rate unchanged at next week’s board meeting.

August inflation data may give the RBA the breathing space it needs to keep rates unchanged next week but persistent core inflation – a common trend observed in other advanced economies – the chance of another increase by year end remains, according to KPMG chief economist Brendan Rynne.

KPMG chief economist Brendan Rynne.

Inflation was restrained by various government energy rebates in August but there remains upside risk to Westpac’s CPI and Trimmed Mean forecasts, said the bank’s senior economist, Justin Smirk.

But CBA said the rise in inflation in August was “a temporary hump” and would not alter the RBA’s view on rates at next week’s board meeting.

The rebound in inflation based on the August CPI indicator, was entirely expected given a sharp increase in petrol and diesel prices, according to CBA economist Stephen Wu.

“We view the uptick in inflation in August as a temporary hump in the downward trend in train since December last year,” he said.

“We think the RBA will be inclined to see it that way too when it meets next Tuesday for the October rate decision. We don’t anticipate the August CPI will alter their view the current cash rate of 4.1 per cent is restrictive enough to pull inflation back inside the target band.”

Mr Wu said that a further tightening in financial conditions would continue even as the RBA remains on hold for the rest of the year.

Originally published as Inflation uptick raises prospects of another rate rise, say economists