Global markets are holding their breath for the release of Australia’s Monthly Consumer Price Index (CPI). Economists are forecasting a small increase in inflation for August. That year-over-year increase is projected to reach 2.9%, an increase from 2.8% in July. This critical data point will be out on Wednesday. It’s central to the Reserve Bank of Australia’s (RBA) monetary policy forward guidance.
The year-on-year CPI – the most common way to calculate inflation – shows price changes from August 2023 to August 2022. This new indicator provides inflation data on a monthly basis rather than the standard quarterly CPI. As a result, you’re able to react faster to shifts in the economy. Market attention is fully trained on the next release from here. This event will have a lasting impact on how the RBA proceeds in coming decisions.
An even softer reading from the CPI would help confirm the ongoing disinflation trend seen over the past few months. Should inflation continue to moderate, the RBA would be wise to leave room for further monetary loosening this year. They’re particularly likely to do this if economic growth begins to decelerate. New data are painting a troubling picture of reemerging price pressures. These pressures largely stem from the increase in housing costs, food inflation, and the effect of increased alcohol and tobacco costs.
U.S. Federal Reserve Chair Jerome Powell sounded a dovish note in his comments this morning. There, he explained the evolution of monetary policy and what it means going forward. He was pleased, of course, that the 25 basis point cut last week deepened U.S. monetary policy’s array move toward neutrality. He pointed out that it is still “modestly restrictive.” By the time Ben finished speaking, the U.S. Dollar was down about 4% on the day. That adjustment hasn’t had a real impact on where these currency pairs are heading, and the AUD/USD has continued to hold fairly strong.
Australia’s core inflation measure—the trimmed mean—jumped to 2.7%, with the index excluding volatile items accelerating to 3.2%. These figures suggest that inflation is still heading in the right direction and is now comfortably within the RBA’s target band of 2-3%, although risks are still two-sided. Michele Bullock, the new Governor of the RBA, is clearly aware of the tightrope she is walking. She noted that inflationary pressures have already fallen back to baseline levels. She’s warned that unknowns still exist and that the industry as a whole should not get complacent.
Market analysts are intensely focused on the AUD/USD currency pair. Traders are still juggling the audio of Powell’s words as they await Australia’s Q2 CPI to cross the wires. The market sentiment remains cautious, with many investors refraining from making significant moves until more concrete data emerges from the Australian economy.