Australia Monthly CPI Preview: Inflation expected to rebound to 5.2% in August
- The Australian Monthly Consumer Price Index is forecast to rise 5.2% YoY in August, up from the 4.9% increase recorded in July.
- CPI inflation is expected to show its first reacceleration since April.
- Soaring petrol prices in Australia are likely to push inflation higher.
The Australian Monthly Consumer Price Index (CPI) inflation data for August will be published by the Australian Bureau of Statistics (ABS) on Wednesday at 01:30 GMT. The data could be critical for the Australian Dollar (AUD) and the Reserve Bank of Australia (RBA), which will hold its October monetary policy meeting next week.
Inflation in Australia (AU) peaked in December 2022, when the Monthly CPI showed an 8.4% year-on-year increase. Since then, it has been trending lower, with only a rebound observed in April. Last month, the inflation number surprised with a lower-than-expected reading, reinforcing the expectation that the RBA would maintain interest rates unchanged in September as it did. Another soft reading looks unlikely in August as petrol prices have risen considerably, leading experts to anticipate a potential reacceleration in inflation.
What to expect from Australia’s August inflation rate?
A rebound in the inflation rate in Australia in August could increase the expectation of another rate hike from the RBA, although not necessarily at the upcoming meeting next week. The quarterly Consumer Price Index remains the most important measure of household inflation. Since the monthly data is derived from the available data from the quarterly CPI, a rebound in August is likely to anticipate a hotter Q3 CPI reading, which will be released on October 25.
The market does not favor a rate hike at the October 3 meeting, which will be Michele Bullock's first meeting as a Governor. The expectation for a rate hike increases for the November and December meetings. According to Bloomberg's World Interest Rate Probability (WIRP), the odds of another rate hike rise to 85% for the first quarter of next year. Interest rate futures indicate that the market expects the cash rate to peak around 4.55% in the first quarter of 2024, higher than the current 4.10%.
An analyst at TD Securities explained that a significant upside surprise in the monthly CPI “adds scrutiny to the Q3 CPI printout in late October. “We can't discount the odds of an insurance hike in November, especially given the risk of an inflation resurgence after the march higher in commodity and energy prices.”
If the Consumer Price Index shows inflation not slowing down and, on the contrary, accelerating further above the 2%-3% target range, the Australian Dollar could receive a boost as markets would consider further tightening ahead. However, if the Monthly CPI comes in below expectations, it could hurt the Australian Dollar, but it will be positive news for the Australian economy.
When will the Monthly Consumer Price Index report be released, and how could it affect AUD/USD?
The Monthly Consumer Price Index inflation data for August is scheduled to be published at 01:30 GMT on Wednesday. Since August, the AUD/USD pair has been trading within a range between 0.6500 and 0.6350, reaching the lowest levels of the year. The pair's decline can be attributed not only to a weaker Australian Dollar but mainly to a stronger US Dollar driven by higher Treasury yields and the strong performance of the US economy. The CPI figures could have a limited impact on the pair, particularly if they come in line with expectations. A significant surprise in the data may be required for the AUD/USD to approach the limits of the current range or even break out of it.
Expectations of another rate hike from the RBA could potentially boost the AUD/USD pair in the near term. However, it is unclear how long-lasting the impact would be. The combination of higher inflation and monetary tightening at a time when the economy is facing challenges may limit the upside potential for the Australian Dollar and could ultimately have a negative impact.
The AUD/USD pair is following a bearish trend, finding support around the 0.6350 area, while the rebound has been limited around the 0.6500 area. The future direction of the pair largely depends on a consolidation outside of these two levels. A convincing break above 0.6500 could open the doors to a more sustainable appreciation, but it would likely require improvements in economic data and a positive outlook for China.
On the contrary, negative market sentiment and a worsening economic outlook could continue to put pressure on the pair around 0.6350, and a break below this level could lead to a downward acceleration, targeting 0.6300. The next medium-term support level stands at the 0.6260 zone.
RBA FAQs
What is the Reserve Bank of Australia and how does it influence the Australian Dollar?
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
How does inflation data impact the value of the Australian Dollar?
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
How does economic data influence the value of the Australian Dollar?
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
What is Quantitative Easing (QE) and how does it affect the Australian Dollar?
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
What is Quantitative tightening (QT) and how does it affect the Australian Dollar?
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.