Overview: A highly encouraging inflation report
The Q2 25 CPI was a very encouraging set of numbers. The policy relevant trimmed mean inflation increased by 0.6%/qtr and 2.7%/yr. Broadly speaking, the result was softer than both our expectations and the consensus of economists.
Indeed, the undershoot leaves inflation tracking very closely to what the RBA had expected in May. Given their recent caution about possible upside risks to their previous forecasts, it is likely today’s print came in lower than their most recent nowcast.
In terms of the detail, the forecast miss from our point of view came from a softer outcome for health and international & domestic travel. CBA’s calculation of administered services, the key category we identified as likely to retain some stickiness, eased much more than expected to 4.1%/yr (CBA expected 4.6%).
Other key categories we are focussed on broadly came in as expected. The RBA’s preferred measure of market services eased to 3.1%/yr and rents and new dwelling inflation eased to 4.5% and 0.8% through the year respectively – in line with expectations.
There was close to universal improvements in market services categories. This lines up with wages growth that has eased materially in recent years.
International and domestic travel did not bounce as much as expected in June which is usually a seasonally strong month for international revellers.
Headline inflation rose by 0.7%/qtr to come in at 2.1% in annual terms. This was again a touch below our expectation and bang on the RBA’s forecast from the May Statement on Monetary Policy.
As we touched on in the preview, the main concern about stickiness within the inflation basket was centred on administered prices. But given this segment of the basket is not generally linked to excess demand in the economy – even residual inflationary pressure here in our view was not a major cause for concern.
But even here the inflationary pulse was weaker than expected.
There appears very little in the inflation basket that suggests inflation risks will re accelerate and become a material problem over the forecast horizon. Instead, the risks appear to be on the downside to the midpoint, especially if the economic recovery continues to disappoint.
Implications for RBA: 25bp rate cut in August on track
The RBA should be pleased with the latest inflation results. Not only just the headline and trimmed mean quarterly prints, but the components as well. Good progress is being made on housing, market services and the stickier administered prices.
An on-hold decision in July was driven by wanting to wait and see the full quarterly CPI to cut interest rates again.
A broadly in line print against the RBA’s revised expectations after the monthly CPI prints ‘rubber stamps’ a rate cut in August.
We expected if the trimmed mean annual rate continued to moderate, the RBA would cut rates in August. A shift from 2.9% in Q1 25 to 2.7% in Q2 25 makes the RBA Monetary Policy Board’s decision straight forward at the August meeting.
We can see a consensus decision forming to cut the cash rate in August after the encouraging CPI report. This follows the 6-3 decision in July to leave the cash rate on hold.
We will also receive updated forecasts as part of the Statement on Monetary Policy. To date the economy is tracking largely in line with expectations. The June quarter unemployment rate was 4.2%, right in line with expectations. But underneath the hood there are signs of a looser labour market emerging. The jury also remains out on the strength of the consumer recovery, and this remains the largest risk factor in our view. Next week, we will release our full preview of the August RBA Monetary Policy Board meeting.
Beyond August though we do expect the RBA Board to remain cautious despite an encouraging June quarter CPI. A clear preference to wait for quarterly CPI prints and the quarterly forecast refresh seems likely to remain in place this cycle, especially as we approach neutral.
We favour November (3-4/11) as the next most likely outcome for the next 25bp rate cut after August. A meeting is held prior to that on 29 30 September. It would take a real shift weaker in economic data, particularly the labour market through a meaningful lift in the unemployment rate to consider that meeting ‘live’.
We next hear from the RBA on July 31. Deputy Governor Hauser is delivering a fireside chat. Post the July meeting, it is clear that very little forward guidance will be given about the upcoming August decision. Instead, we would expect a staff perspective on the CPI data released today and how they see this in context with lingering concerns around elevated unit labour costs and other pricing signals in the Australian economy.
See here to read Harry Ottley's full analysis on the CPI data.
