By Belinda Allen, head of Australian economics at CBA:
- The August monthly CPI surprised to the upside.
- There is clear upside risk to Q3 25 CPI and makes a November RBA rate cut not a done deal.
- The week ahead brings the RBA Monetary Policy Board meeting. We expect the cash rate to remain steady at 3.60%.
- The focus will be on statement and press conference given the recent tension in the data flow.
- The week ahead will see building approvals, home prices, MHSI, credit, trade balance and the Final Budget Outcome.
- Offshore, the RBNZ appointed a new Governor, Anna Breman while themarketfocus remained on the FOMC cutting cycle.
- Non-farm payrolls data will be released late next and will garner significant attention in the US.
It was a busy week locally when the August CPI threw a spanner in the works, suggesting strong upside risks to September quarter inflation projections and the outlook for the Reserve Bank of Australia (RBA).
The August monthly CPI printed at 3.0%/yr for headline and 2.6%/yr for annual trimmed mean inflation. The headline CPI figure was strong compared to our estimate of 2.7%.
Smaller falls in electricity and the volatile holiday travel component explains some of the miss. The timing of electricity rebates again impacted the numbers.
But the real surprise was in stronger market services inflation as well as housing inflation. We estimate the RBA’s preferred measure of market services inflation rose by ~1.1%/qtr in August (middle month used as quarterly change for most market services). This was higher than our expectation going into the release of 0.7%.
New dwelling construction costs are also printing at a higher rate of growth than in late 2024 and early 2025.
We currently have a 0.7%/qtr, 2.6%/yr trimmed mean outcome pencilled in. But the data flow presents firm upside risks to this estimate and follows a stronger than expected July CPI number.
The monthly CPI indicator can, however, provide an incomplete steer at times. We will firm up our quarterly forecast in the coming weeks.
The surprising result follows a better flow of survey and activity data in the Australian economy since the RBA August Board meeting. We have been noting growing tension in the data between a cyclical upswing in activity indicators, softer employment growth, and now this inflation data.
It has muddied the path forward for the RBA also. Market pricing has shifted significantly this week. Markets are pricing no chance of a cut in September, compared to 20% chance at the start of the month.
The movement for the November has been more dramatic. Pricing has moved from an 80% chance for a 25bp rate cut under 50%.
In terms of the RBA meeting on Tuesday we expect no change to the cash rate. Instead the focus will be on the accompanying statement and press conference given the recent data flow. The Governor’s recent comments had suggest inflation was in a good place and the economy was undertaking a cyclical recovery.
How the Board frames the risks either side and the outlook for the cash rate will be the key focus. At this stage we do expect a 25bp rate cut in November but the outcome of the meeting is not a done deal. Instead, it will be highly dependent on the Q3 CPI outcome, with an acceleration in the trimmed mean CPI from 2.7%/yr in annual terms making a rate cut a tough ask. The labour market data will also be important to watch.
The week ahead locally also brings with it a raft of data releases. The housing market will be in focus with building approvals data and home price data out.
We expect a rebound in approvals of 2.5% following a fall last month, while home prices are again expected to lift by 0.8% across the eight capital cities.
The ABS monthly household spending indicator should continue the recent theme of better spending data, we expect a 0.3% lift in August.
The Final Budget Outcome is expected to be released. The goods trade balance and private sector credit finishes a busy week of data.
Offshore the focus remains on the US FOMC easing cycle with pressure to cut rates quickly by the new Fed Governor Stephen Miran.
The RBNZ appointed a new Governor, Anna Breman. US payrolls data will be the offshore highlight, along with the PCE deflator due tonight Sydney time.
