Australian Consumer Price Index Update

Australian consumer price index (CPI) inflation increased as anticipated in the second quarter, while softer core inflation heightened expectations that the Reserve Bank will not raise interest rates further.

CPI inflation rose 3.8% year-on-year for the three months ending June 30, according to the Australian Bureau of Statistics. This matched expectations and marked an increase from 3.6% in the previous quarter.

Underlying inflation, which excludes volatile items like fresh food and fuel, decreased to 3.9% from 4%. This figure is closely monitored by the Reserve Bank of Australia (RBA) in its monetary policy considerations.

Quarter-on-quarter, CPI inflation grew 1%, in line with expectations and steady from the previous quarter. Core CPI inflation increased by only 0.8%, below the predicted 1%.

Despite a rise in inflation for the second quarter, signs of cooling emerged, particularly with the decline in underlying inflation.

A monthly CPI indicator for June confirmed inflation falling to 3.8% from 4.0%, as expected.

The data has strengthened the belief that the RBA will refrain from further interest rate hikes. Following this news, Australian stocks surged, with the ASX 200 climbing 1.2%, approaching record highs.

In contrast, the Australian dollar experienced a sharp decline, with the AUD/USD pair falling 0.6% to a three-month low, influenced by a drop in bond yields.

Previously, a series of stronger-than-expected CPI figures had raised expectations for RBA rate increases, as the central bank maintained a hawkish perspective amid persistent inflation.

However, Wednesday’s report reduces the likelihood of new rate hikes, although relatively sticky inflation indicates the RBA may sustain higher interest rates for a prolonged period. Core inflation remains significantly over the RBA’s 2% annual target.

Additional data reflects some robustness in the Australian economy, with retail sales rising more than anticipated by 0.5% month-on-month in June, compared to the estimated 0.2%.