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The second quarterly decline might be too little for the RBA to pause rate rises again next week, according to economists.
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Inflation falls, but RBA rates decision an each-way bet
27 July 2023
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The latest ABS data indicated underlying price pressures were lower in the June quarter, with annual CPI dropping to 6 per cent year on year.
Barclays Economics Research is predicting inflation to average 5.4 per cent for the year despite inflation in the second quarter being lower than forecast by the bank.
“While price pressures appear to be easing, utility prices are expected to push inflation higher in the third quarter, offsetting disinflation pressures elsewhere,” Barclays said in the update.
“Additionally rising wages also seem to be pushing prices higher across the board, mostly for services. We expect trimmed-mean inflation to average 4.9 per cent.”
Barclays said while recent RBA commentary has been dovish compared its previous statements, signalling that the RBA may be close to the end of the hiking cycle, the bank expects there will be one more rate hike.
“The RBA has been particularly concerned about services inflation, which rose to the highest since 2001,” it said.
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“Wage-full inflation is unlikely to fall immediately, which coupled with the strong labour market data from June is likely to be a continued cause of concern.”
RBA must allow time for lagging indicators
Economists have warned that the Reserve Bank has likely done enough in relation to interest rates with slowing demand, improving supply and falling global inflation suggesting that Australian inflation will fall further.
AMP is now predicting headline and timed mean inflation falling to 3 per cent or just below by mid next year.
AMP chief economist Shane Oliver said this should provide scope for the RBA to remain on hold at its meeting next week.
“Unfortunately, though it may not be enough for the RBA which is likely to still be concerned about further upwards pressure on services inflation from rents and power bills, the still tight labour market and upside risks to wages growth posing the risk that inflation will take longer to return to target than it is forecasting,” said Dr Oliver.
“As such, next week’s RBA meeting is now a very close call. And it could be affected by retail sales data on Friday.”
Dr Oliver said in AMP’s view, the RBA has already done more than enough to return inflation to target in a reasonable period.
“The RBA and other central banks need to tread carefully from here and allow for the lags from the rapid rise in interest rates to work through lest they end up pushing unemployment far higher than they need to in order to return inflation to target,” he said.
ANZ senior economist Adelaide Timbrell said that the RBA would likely find comfort in the CPI data as both headline and trimmed mean inflation came in below the central bank’s forecasts.
“The RBA recently highlighted that the cash rate is ‘clearly restrictive’ and that it remained to be seen if more cash rate increases are required,” she said.
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