The Potential Impact of Inflation Trends on the AUD and RBA's Rate Decisions

Inflation will likely rise again in September

The chart above shows where most of the inflation came from in August. A  9.1% increase in motor fuel prices lifted the transport component by 3.6% MoM. This is likely to be repeated in September, as retail gasoline prices have continued to rise, though it may not be quite so large as indexed excise duties on fuel will not reoccur until February next year. 

That same twice-yearly excise duty indexation also means that some other price rises are not likely to be repeated next month. Alcohol and tobacco prices, for example, rose 1.3% MoM in August. With rising inflation, comes a rise in excise duties. That resulted in an August jump in the price of booze and tobacco six months after excise duties were raised in February. But that won't reoccur again until next February, so this component is likely to be much flatter in September.

The housing component is still rising strongly, with rents up  0.7% MoM,  the same as July, and only slightly down from their June peak growth of 0.9% MoM. Some moderation over time is probable. But with supply still constrained and strong demand in the face of a rising population, we don't expect much slowdown any time soon. 

One factor that was a sizeable drag for a second consecutive month, was recreation. This is a seasonal factor. The end of the holiday season leads to a drop in the prices of hotel room charges and airfares. But it doesn't last. So this month's 3.9% MoM decline in holiday prices, after July's 3.3% decline, is likely to revert to a positive figure in September in line with past trends. 

 

The AUD has taken some comfort from the data

The AUD started the day languishing below 64 cents to the USD, but it has been buoyed by this data, and by the growing possibility of a bit more rate support from the RBA, recovering back above 64 cents. Futures markets are still undecided about the RBA, with very little chance of a rate hike priced in before the end of this year, rising to a peak of about a 66% probability for a further 25bp of tightening, though not until May 2024. 

We think that if the RBA is going to hike again, it will need to be this year, as we don't believe the current inflation backsliding will last beyond the year-end. So we'd expect these cash rate futures to start pricing in more tightening sooner over the coming months, as headline inflation continues to go in the wrong direction. That may also provide some additional lift to the AUD, though for that, we also would like to see some generalised USD weakness, and the US inflation and rates story is very similar to that of Australia, so we aren't taking that for granted.