Suring consumer prices in Q2 have severely, likely fatally, damaged the case for another cut to the official cash rate in Australia this year. Core CPI is running significantly hotter than the market expected and is uncomfortably close to the top of the Reserve Bank of Australia’s (RBA) target range. This restricts the ability of the bank to ease policy further and reduce the impact of a stubbornly high Australian dollar.
Core inflation heats up
Headline CPI jumped 0.5% q/q and 3.0% y/y last quarter (prior 2.9% y/y), matching estimates. The big surprise came from a 0.8% q/q increase in trimmed mean CPI over the same period, beating an expected 0.6% rise and putting year-on-year core CPI at 2.9%. This pushes core inflation awkwardly close to the top of the RBA’s 2-3% target range. Weighted median CPI increased slightly less than expected at 0.6% q/q, but it also remains strong.
The housing market is putting upward pressure on inflation
While inflation is expected to moderate in coming quarters due to sluggish wage growth, upward pressure on the unemployment rate and softer domestic demand, a strong housing market is going to continue to put upward pressure on non-tradables inflation. This sector was one of the main contributors to the jump in inflation last quarter (0.8% q/q). There is also the risk that a housing bubble will develop if house prices continue to soar, which will put a lot of pressure on the RBA to tighten monetary policy. Even tradables inflation, which accounts for around 40% of CPI, is running hot, rising 2.9% y/y to June despite the strong exchange rate. Non-tradables inflation jumped 3.1% y/y.
AUDUSD
The Australia dollar immediately surged higher on the back of Australia’s inflation data as investors unwound bets of another rate cut. AUDUSD obliterated 0.9400, before hitting some resistance around 0.9440 (61.8% retracement level from this month’s high). With the technicals now looking up, a break here could see the pair make a run for another resistance zone around 0.9505.
Source: FOREX.com
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