'Unfortunate kick in the guts' as inflation data increases RBA rate hike risk

Australia's inflation rate cooled slightly in July, but the figures surprised economists and have heightened the possibility of another interest rate hike. The annual headline inflation rate rose to 3.5 percent, a decrease from 3.8 percent in June but higher than the 3.3 percent predicted by many analysts.

“

On a monthly basis, automotive fuel prices rose 7.5 per cent in July after falling for three months in a row. This was driven by higher world oil prices and the partial unwinding of the federal government's fuel excise relief measures in July.

The Australian Bureau of Statistics reported that housing costs, up 5 percent annually, were the largest contributor to inflation. Food and non-alcoholic beverages, along with recreation and culture, also saw increases. Notably, automotive fuel prices surged 7.5 percent in July after three months of declines, driven by rising global oil prices and the expiration of federal fuel excise relief.

While the headline rate has fallen since February, the underlying inflation measure, preferred by the Reserve Bank of Australia (RBA), remained unchanged at 3.6 percent. However, the monthly trimmed mean figure increased to 0.5 percent, prompting warnings from economists. AMP economist My Bui noted that annualizing this monthly figure suggests inflation is still too far from the RBA's target range of 2.5 to 3 percent.

“

If you annualise that number we get 3.6 [to] 3.8 per cent, so that's just way too far from the RBA's target [between 2.5 to 3 per cent]. And even on the annual numbers, it has been 3.6 per cent three months in a row, contrary to people's hope that it been softening somewhat. This inflation seems not to move at all. It is still stuck around that really high range.

"This inflation seems not to move at all. It is still stuck around that really high range," Bui said. The RBA's September meeting is now considered "live," with a high chance of another rate hike before the year's end, especially as the government's fuel excise reduction ended at the start of August.

“

Today's higher than expected underlying inflation result is an unfortunate kick in the guts for an already ailing economy as it increases the risk of yet another Reserve Bank interest rate increase at next month's policy meeting.