By Stella Qiu and Wayne Cole
SYDNEY, Sept 30 (Reuters) – Australian inflation accelerated in August as fuel costs surged anew and price pressures remained broadly based, showing no signs of easing despite a run of interest rate increases this year.
Sticky inflation already forced the Reserve Bank of Australia to lift interest rates to a 15-year high of 4.6% on Tuesday and warn it was ready to hike further if needed. That brought its tightening this year to a full percentage point, far ahead of many other developed economies.
The inflation print was, however, a little less than forecast, with the Australian dollar slipping 0.2% to $0.6974 and 3-year government bond yields falling 5 basis points to 4.925%. Swaps pared back the risk of a November move to just 20% from 35% before, but a final hike is still fully priced by March next year.
Data from the Australian Bureau of Statistics on Wednesday showed its monthly consumer price index rose 0.4% in August from July as fuel costs jumped 14.8% due to higher oil prices and the unwinding of government tax relief.
That came slightly under forecasts of a 0.5% gain, but the annual pace still pushed higher to 4.0% from 3.5%, well above the RBA’s target band of 2% to 3%.
The trimmed mean measure of core inflation increased by 0.2% in the month, leaving the annual pace steady at 3.6% for a third month. That has yet to slow down after the RBA kickstarted its tightening cycle in February, with seven of 11 groups of prices monitored by the ABS rising at 3% or more.
Faraz Syed, a senior economist at Citi, said markets were underpricing the risk of another rate hike in November, arguing the implied probability should be closer to 50% given the quarterly trimmed mean measure is still expected to land at 1%, too hot for the RBA.
“The Bank cannot forecast inflation returning back to the target in the next six-months, and therefore needs to tighten policy further to curb inflation expectations. A terminal of 4.85% remains our base case with risks to a delayed hike.”
Wednesday’s report showed new dwelling prices jumped 5.4% in August from a year earlier as builders passed higher costs on to buyers. Electricity prices surged 13.2% from a year earlier.
The downward surprises came from clothing and travel, with demand for domestic travel easing following the end of a school holiday period.
FRONTRUNNING GLOBAL HIKING CYCLE
The RBA has out-hawked many of its global peers including the Federal Reserve and the European Central Bank, after three rate cuts in 2025 helped fuel domestic inflationary pressures. Now, with the US-Israeli war on Iran pushing energy prices higher for longer, policymakers worry inflation could become entrenched, having already run above target for five straight years.
Having hiked rates four times this year, RBA Governor Michele Bullock on Tuesday noted the long lags in monetary policy and said the central bank wanted to be more forward looking and observe the economic impact of the four rate hikes.
That is partly why markets are not fully pricing in a move this year, but risks are still skewed to the upside.
One of the inflation risks the RBA has warned about is still building – Westpac is forecasting a 0.6% expansion in the economy this quarter on data centre investment, lifting annual growth to 2.3%, above the 2% the central bank believes can be sustained without generating inflation.
“A November hike is now the base case, absent a lasting resolution of the Middle East conflict beforehand, or some other event that significantly lowers the outlook for energy-related costs in Australia,” said Luci Ellis, chief economist at Westpac.
That would leave the housing market and mortgage holders bearing much of the pain. The RBA has flagged housing as a downside risk to the economic outlook and its latest rate hike is likely to trigger the worst housing downturn in the country in three decades.
Prices are already down 8% in Sydney and 7% in Melbourne this year, data from Cotality showed.
(Reporting by Stella Qiu and Wayne Cole; Editing by Jacqueline Wong and Thomas Derpinghaus)
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