Australian Inflation Eases, August Rate Hike Chance Near Zero

The Reserve Bank of Australia is unlikely to raise rates at its August meeting after June inflation came in softer than expected, financial markets signaled Wednesday.

The consumer price index rose 3.8% over the year through June, the Australian Bureau of Statistics reported. That is down from 4.0% in May. The RBA’s preferred core gauge, the trimmed mean, held steady at 3.6%. Both prints landed a tick below economist forecasts.

The numbers are the last domestic inflation read the RBA will get before its Aug. 10–11 policy meeting. Futures markets priced the chance of a rate hike next month to near zero after the data crossed.

RBA Governor Michele Bullock on Tuesday warned the bank was “prepared to act as required” if new inflation pressures emerge. She said the central bank is assessing risks to inflation over the months ahead, not just the June figures.

Housing costs drove the annual increase, rising 6.8%. Food, non-alcoholic beverages and transport also contributed. Automotive fuel posted the biggest monthly decline as global oil prices fell in June.

Services inflation stayed sticky, especially in rent and housing-related categories. That signals underlying domestic price pressures have not fully faded, the bureau’s data show.

The RBA has raised the cash rate three times this year – in February, March and May – as it tries to force inflation back to its 2–3% target. The trimmed mean peaked at 6.8% in December 2022 and has since dropped sharply.

Employment data last week complicated the picture. The economy added 76,300 jobs in June, well above estimates. The labour market remains tight enough for the RBA to keep focusing on inflation, economists said.

The bigger risk now sits outside the June report. Oil briefly pushed above US$100 a barrel this month amid renewed Middle East tensions before easing back. Higher oil prices raise transport, freight and production costs throughout the economy. Businesses eventually pass some of those higher costs to consumers.

Australia is less vulnerable to oil shocks than it once was, the RBA has said. Sustained oil above US$100 would still complicate the inflation outlook. Unlike demand-driven inflation, this is a supply shock that interest rates cannot directly offset.

If higher oil prices prove temporary, the RBA is likely to look through the direct effect on inflation, traders said. The greater concern is that higher energy costs begin feeding into transport charges, business costs, wages and inflation expectations, making inflation more persistent and harder to break.

The RBA on Aug. 10–11 will weigh evidence that inflation was easing against the chance that the improvement is short-lived. Whether another rate increase becomes necessary depends on how persistent the oil shock turns out to be, Bullock has indicated.