AUD: All clear on inflation – Commerzbank

Australia also reported its monthly inflation figures this morning, Commerzbank's FX analyst Volkmar Baur notes.

Trend in inflation is moving in the right direction

"Although only part of the price index is examined and updated monthly, this still provides an excellent early indication of the quarterly ‘full’ inflation report. With a year-on-year increase of 2.1%, inflation has now reached the lower end of the Reserve Bank of Australia's target range, retrospectively validating the central bank's 20 May decision to cut interest rates. The next meeting is scheduled in two weeks' time, and I would expect another cut in the cash rate then as well."

"Two figures in the inflation report are particularly encouraging. Firstly, inflation in service prices fell to 3.29% year-on-year, which is the lowest level in three years. Given the still tight labour market, the service sector is one of the central bank's main concerns. The significant decline should therefore be just what the central bank needs. It could be argued that the sharp decline in package holidays contributed to this, and that this sub-component is highly susceptible to fluctuations."

"However, the so-called 'trimmed mean' inflation also fell to just 2.4% year-on-year in May, its lowest level since late 2021. By definition, this calculation method excludes components susceptible to volatility. Therefore, the trend in inflation is moving in the right direction, paving the way for the next key interest rate cut on 8 July. However, the market has fully priced in this step, so it should not affect the AUD."