David Bassanese
3 minutes reading time
Today’s monthly CPI report can only be described as an absolute shocker. The biggest disappointment is the fact that annual trimmed inflation has rebounded from an encouragingly low 2.1% in June to an ugly 2.7% in July.
The immediate monetary policy implication is to likely remove any chance of a Reserve Bank of Australia (RBA) interest rate cut at the September policy meeting. The ongoing volatility in the annual trimmed mean measure of inflation from the monthly CPI reports also once again justifies the RBA decision not to cut rates in July and instead wait for evidence of easing inflation in the more reliable quarterly report later that month.
One possible indirect factor behind the rebound in underlying inflation is the equally strong rebound in headline inflation due to the inevitable surge in electricity prices as government subsidies are finally unwound. In July alone, electricity prices shot up 13.1%! Many households may face sticker shock when they next open their electricity bills.
As a result, annual headline inflation rose from 1.9% to 2.8%.
Although underlying measures of inflation, such as the trimmed mean, strip out the most volatile price movements – such as electricity prices over the past year – large changes in the prices of certain items can indirectly influence underlying inflation estimates as they can shift the central point of the distribution of price changes among remaining items.
For example, a sharp drop in electricity prices can cause CPI items with typically low price increases – usually excluded from trimmed mean calculations – to be included. As such, this can indirectly drag down trimmed mean CPI estimates. The same effect works in reverse when electricity prices rise strongly.
Therefore, it is possible that part of the recent decline in underlying inflation may be indirectly related to temporary government cost of living support measures. The decline in underlying inflation may not have been as great as we’ve been led to believe.
All that said, today’s shock CPI report does not necessarily rule out further RBA rate cuts. It’s still quite possible that the RBA cuts rates in November, though it’s no longer the done deal we previously believed. It will, as was the case in August, come down to the next quarterly CPI report due in late October. If annual trimmed mean inflation only holds steady at 2.7% in the September quarter report, a Melbourne Cup rate cut could be a long shot. My expectation that annual trimmed mean inflation will drop to 2.5% – or at worst 2.6% – however, still makes a rate cut the favourite.
