Australian inflation eased only marginally in July, with headline consumer prices rising 3.5% over the year, down from 3.8% in June but above economists’ expectations for a sharper slowdown.
More importantly for the Reserve Bank of Australia (RBA), trimmed mean inflation — its preferred measure of underlying price pressures — held steady at 3.6% over the 12 months to July, remaining well above the central bank’s 2%-3% target range.
Housing was the largest contributor to annual inflation, rising 5.0%, followed by food and non-alcoholic beverages at 3.2% and recreation and culture at 2.6%.
Australian Bureau of Statistics (ABS) head of price statistics Rachael McCririck said new dwelling prices rose 5.7% over the year as builders passed on higher material and labour costs.
RBA inflation challenge persists
The result follows a softer-than-expected June inflation reading, when transport costs were dragged lower by the Federal Government’s reduction in fuel excise.
The RBA left the cash rate unchanged at 4.35% at its August meeting, with Governor Michele Bullock warning inflation remained too high to begin considering rate cuts.
The monthly CPI reading is unlikely to determine the RBA’s next move by itself, given the central bank places greater weight on quarterly inflation data, but the persistence of underlying pressures is likely to reinforce its cautious stance.
Wee Khoon Chong, senior APAC market strategist at BNY, described the July reading as “sticky”, noting trimmed mean inflation had failed to ease.
“The data reinforce upside inflation risks and are likely to outweigh last week’s softer employment report,” Chong said.
He does not expect the CPI result alone to trigger a policy change at the September meeting, but expects the RBA to maintain its view that policy remains “somewhat restrictive” while continuing to highlight inflation risks.
The Australian dollar and shorter-dated bond yields moved higher following the data, with Chong seeing scope for further Australian dollar strength as traders unwind short positions.
Rate hike debate returns
State Street Markets head of APAC macro strategy Dwyfor Evans said the stronger-than-expected result would bring renewed attention to the RBA’s recent warnings that inflation risks remained elevated.
State Street’s PriceStats data for August pointed to monthly price increases of around 0.5%-0.9% by mid-month, largely due to higher energy costs.
Evans said this would keep discussion of further monetary tightening alive and could support the Australian dollar through relative interest rate expectations.
VanEck head of investments and capital markets Russel Chesler went further, arguing the inflation data strengthened the case for another interest rate rise before the end of 2026.
“With this inflation result, we are of the view that there will have to be at least one more RBA hike this year to temper inflation,” Chesler said.
He pointed to the unchanged 3.6% trimmed mean reading, continued wage pressures and broad-based increases across housing, food and recreation as evidence that inflation remained entrenched.
Chesler also highlighted unemployment of 4.5% and rising job advertisements as factors likely to keep services inflation elevated.
What it means for investors
VanEck expects an environment of persistent inflation and potentially higher rates to favour companies offering growth at reasonable valuations.
Chesler highlighted materials companies South32, Sandfire Resources and Evolution Mining, while expressing a preference for small- and mid-cap stocks over larger companies where valuations are less stretched.
SRG Global and Bravura Solutions were also identified as companies VanEck believes could be relatively well positioned if Australian interest rates remain higher for longer.