Cliff Notes: inflation receives a jolt
Key insights from the week that was.
The main event for Australia this week was the Monthly CPI Indicator, and it certainly was a striking result. The headline CPI indicator bounced 0.9% in July, driving annual inflation from 2.1%yr to 2.8%yr, near the top of the RBA’s target range. That the trimmed mean measure also shot up to 2.7%yr points to a broad-based pick-up in underlying momentum and consequently upside risk to our Q3 CPI forecast.
One month’s data does not make a trend, especially as electricity prices drove the result. Underlying July’s 13% surge in electricity prices was a combination of state rebate roll-offs, the varied timing of the Commonwealth rebate extension and standard annual price increases. While each dynamic is well understood, their timing is uncertain, hence the relatively subdued reactions to the July report from market participants who continue to expect a 25bp rate cut in November.
In the lead-up to Q2 GDP next week, we also received two partial indicators of investment.
Construction activity was firmer than expected, bouncing 3.0% in Q2 to be up 4.8% over the year. This was mostly driven by a surge in lumpy mining infrastructure installations, accentuated by the release’s accounting treatment that sees projects recorded on completion versus the National Accounts’ accrual method (which incorporates activity completed each quarter). Conditions outside of the mining sector remain delicately poised: public work is retreating from peak levels almost as quickly as it attained them; however, a healthy pipeline of electricity generation and distribution projects should provide offsetting support into the medium-term.
Private CAPEX subsequently disappointed in Q2, a 0.2% gain a long way below the 0.8% consensus expectation. Growth over the past year of 1.7%yr is the result of the building out of essential infrastructure in the non-mining economy – predominately electricity, energy and data assets – while mining investment is 1.0% lower than a year ago. The outlook remains uninspiring, the latest estimate for 2025-26 CAPEX plans pointing to growth in real investment of just 1.2%yr, a touch above FY25’s 0.9%yr gain. To combat low productivity and capacity constraints, strong investment is necessary.
Our full Q2 GDP preview will be released today on Westpac IQ, and the ABS’ Q2 National Accounts release is due next Wednesday.
Offshore markets spent much of the week digesting insights from last weekend’s Jackson Hole Economic Symposium, especially FOMC Chair Powell’s remarks on the near-term outlook for policy.
Powell’s remarks were balanced and constructive overall, highlighting the full spectrum of risks the US economy faces and that the Committee is well placed to adjust policy gradually to match incoming data. That said, Chair Powell's remarks could be interpreted as putting a greater emphasis on the “rising” downside risks for employment which, to date, have been masked by reduced migration and participation.
Referencing the recently completed five-year review of the Federal Reserve’s Monetary Policy Framework, Chair Powell went on to discuss why a tight labour market does not, by itself, signal accelerating inflation and instead needs to be considered in the broader context of the economy and policy. Of course, other potential drivers of inflation also must be taken into consideration. While downside risks to current full employment warrant two cuts from the FOMC by year end, as we and the market forecast, in our view persistent inflationary pressure stemming from capacity constraints are likely to preclude additional easing to a neutral or expansionary setting in 2026, unless labour market slack grows materially.
Turning then to the academic discourse of the Symposium, the evolving state of global labour markets in response to demographic and structural change was the focus. Bank of Japan Governor Kazuo Ueda highlighted the impact of Japan’s ageing population, which has tightened the labour market and spurred increased participation from women as well as older men. Tight conditions have also led to greater job mobility among younger workers and consolidation among smaller firms who are struggling to keep up with wage growth. Ueda also noted that investment in labour-saving technology, particularly in services, is expected to enhance productivity going forward.
Similar dynamics were echoed by ECB President Christine Lagarde who observed that, despite fiscal constraint and the legacy of tight monetary policy, labour markets in the Euro Area have continued to tighten. This strength has been partly driven by delayed wage growth which has contained unit labour costs, thereby making labour a more attractive input. Firms have also increased headcount in response to declining average hours worked, with additional labour demand largely being met by rising participation amongst women, older workers, and foreign labour.
A subsequent paper from Nobel laureate Claudia Goldin investigated the drivers of declining fertility rates – a factor with profound implications for labour supply and policy over coming decades in both the developed world and some large developing markets, most notably China.
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