Australian consumer prices rose at the fastest annual pace in a year in August after a hot July, suggesting some upside to inflation that prompted markets to pare back the chances of imminent policy easing.
Investors doubled down on bets that the Reserve Bank of Australia will skip a move in interest rates next week given the recent flow of data has been on the strong side. Prospects for a move at its November meeting also faded to 50% from almost 70% before the data.
Data today from the Australian Bureau of Statistics showed the monthly consumer price index (CPI) rose 3% in August from a year earlier and up from 2.8% in July, mostly due to base effects. It came in just above median forecasts of 2.9%.
The key trimmed mean measure of core inflation ran at an annual 2.6% in August, down from 2.7% in July. However, a measure excluding volatile items and holiday travel climbed to 3.4% from 3.2%.
Details of the report, mostly in the services sector, suggested some upside risk for third-quarter inflation, which led Barrenjoey, Deutsche Bank, the National Australia Bank, Macquarie and Citi Australia to give up their calls for a rate cut in November.
"On any measure this is a material upside surprise and the detail worrying," said analysts at Barrenjoey in a note to clients, noting they still see room for a rate cut in the first half of 2026.
"It's a windy and uncertain path from here and all the turns need to lean in the same direction for the RBA to be able to deliver this additional rate cut," they added.
NAB now sees interest rates on hold at 3.6% until May next year, compared with two more cuts expected in November and February, while the Commonwealth Bank of Australia said a November cut is not a done deal.
The RBA has downplayed the importance of the monthly CPI data, saying the series remained too volatile, with interest rates only cut this year in February, May and August after assessing the quarterly inflation figures.
Governor Michele Bullock said earlier this week that Australia's economy was in a good place, with inflation expected to return to the mid-point of the target band of 2% to 3%, and the labour market nearing full employment.
The central bank had forecast headline inflation, which ran at 2.1% last quarter, to pick up to 3.1% by the middle of next year, as electricity rebates fade, but core inflation is expected to stay anchored around 2.6% over the coming years.
All up, that suggested little urgency to cut rates for the central bank at the next policy meeting September 29-30, since the labour market has stayed resilient, with unemployment at a historically low rate of 4.2%.
Today's report provided some updates on the services sector for the quarter. Price growth in restaurant meals, takeaway food and audio visual services has accelerated.
New dwelling prices rose 0.7% in the 12 months to August, up from 0.4% as the disinflationary impulse in the housing sector seems to have stalled.
"The only path likely rests on the state of the labour market by November," said Phil Odonaghoe, chief economist at Deutsche Bank.
"Another weak print might be enough to convince the Board that it can move ahead with a rate cut, but the inherent volatility of the monthly labour market makes it a high hurdle, and so we think the probability of a Nov cut is now below 50%," he added.
