Australia’s Monthly Consumer Price Index (CPI) report, hitting the market Wednesday. With this announcement, both economists and investors alike are filled with some of the same enthusiasm. The near-term report will have huge implications for the Reserve Bank of Australia’s (RBA) policy outlook. This all makes it particularly pressing given alarming recent comments from RBA Governor Michele Bullock. With inflation back within the band – 2.7% as of July 2023 – she decided to try and maintain a balanced approach. She cautioned that lasting bilateral risks might still pose a danger to economic stability.
One notable speech given by Jerome Powell last week helps shape the context all around the next CPI release. The Federal Reserve Chair finally sounded like someone who’s committed to monetary policy caution. Weekly on the Hill Last week, Powell signaled a 25 basis point cut. He signaled that monetary policy is approaching neutral, while still being “modestly restrictive.” This sentiment has recently resulted in a softening of the value of the US Dollar, demonstrating the close linkage between global economic sentiment.
In July, Australia’s inflation data revealed a reawakening of price pressures. This increase was largely driven by inflation in housing and food, and inflation increases in alcohol and tobacco. The measure of trimmed mean inflation jumped to 2.7% in July, and the index that excludes all the most volatile items soared to 3.2%. These numbers beg the question of just how long this positive trend can last into August.
Economists forecast that Australia’s August CPI will increase by 2.9% year-over-year (YoY), a slight rise from July’s 2.8%. Another soft reading might add ammunition for the new disinflation trend to continue. That development would allow us to move again with monetary easing later this year if the strength of economic growth were to start decelerating. The monthly CPI indicator was purpose built to provide inflation data at a higher frequency than the old quarterly CPI. This provides the opportunity for much more real-time adjustment to changing economic conditions.
As analysts look towards the CPI release, they will be watching closely to discern the likely impact for the RBA’s upcoming decisions. Michele Bullock’s recognition of inflation coming back down within the target band is a sign of cautious optimism that the economy may be heading towards stability. Her admonitions on both sides of the risk illustrate the delicate balancing act of controlling inflation in an ever-changing economic environment.
The July CPI release will be about more than just delivering a statistical report card. It serves as an essential compass for policymakers to guide them through the fog of uncertainty. If inflation is beginning to stabilize or come down, further restraint through monetary policy is less consistent with the RBA’s strategy. This would unlock significant new opportunities for smart, responsive economic management. On the flip side, if the data shows that inflationary pressures are on the rise, it might require re-calibrating what’s being done today.