Australian inflation is the latest ‘hot beat’ on the dancefloor

Australian consumer prices rose at the annual pace of 7.3% y/y – above the 7% forecast and up from 6.1% in Q2. The RBA’s preferred measures of inflation also came in hotter than expected, with Trimmed mean rising 6.1% y/y (5.6% expected) and weighed mean at 5% y/y (4.8% expected). The newly released monthly y/y inflation print rose to 7.3% - which is a record high as the series only goes back to October 2018. Furthermore, core CPI has now beaten the median economic forecasts for five consecutive quarters. Basically, inflation is hot.

Looking into the monthly basket of inflation shows that the baulk of price increases food and non-alcohol beverages and housing (both at 3.2% y/y). This is a trend we’re seeing the world over, and I’m sure most would agree that inflation for these subsets are actually much higher for many. And with inflation running so sot, the question now is whether the ‘finely balanced’ debate between a 25bp or 50bp hike remains finely balanced at all.

From the RBA’s latest statement: “Medium-term inflation expectations remain well anchored, and it is important that this remains the case”.

The RBA seem to be hanging their hat on that fact that inflation expectations (or at least some measures of them) remain relatively low, and as Governor Lowe pointed out the RBA are basing their policy decisions on inflation expectations – which are lower than current levels of inflation. So perhaps the time to begin assuming a 50bp hike is when we see evidence that inflation expectations are turning higher. And as of the latest report, +3 month business expectation, +1 year consumer inflation expectations and the 10-year breakeven rate have seemingly moved lower. With that said, ING have already upped their forecast for a 50bp hike at their November meeting, which would take rates to 3.1%.

AUD/NZD daily chart:

AUD/NZD is trading back near yesterday’s high as it retraces against its decline from around 1.1500. Given Europe and the US is yet to react, the pair has the potential to continue higher over the near-term. But as I suspect the RBA will stick to a 25bp hike, and the market has the potential to figure this out, I’m now looking for areas of weakness to fade into – such as the 1.1190 low or the lower trendline.