July CPI – Inflation boosted by end of year price resetting
July Monthly CPI: Headline 1.0%mth/3.5%yr, Trimmed Mean 0.5%mth/3.6%yr. Market services ex volatile 0.9%mnth/3.3%yr.
The CPI rose 1.0% in July, stronger than Westpac expectation of 0.8% and market expectation of 0.9%. This saw the annual pace ease to 3.5%yr from 3.8%yr due to base effect of a stronger print a year earlier.
Trimmed Mean (TM) inflation rose 0.5%mth compared to Westpac’s expectation of 0.4%mth with the annual pace holding flat at 3.6%yr. Both Westpac and the market were expecting a 3.5%yr pace.
Market services excluding volatiles increased 0.9%mth/3.3%yr. This core measure of domestic inflation eased from 3.7%yr in June but still holding above the 3%yr pace overall. We need confirm if the outsized increase this month was a one-off due to the larger than expected increase in award/minimum wage or is it something more fundamental.
Dwellings and rents were as expected, underpinning the trimmed mean. The upside surprises were mostly in durable goods (motor vehicles, clothing & footwear, household appliances, furniture & furnishing, audio visual & computing equipment) while household services (restaurants, domestic travel, other recreation activities, other services in respect of motor vehicles) made significant contributions.
Domestic inflationary pressures remain elevated. The question is just how much is due to post financial year price adjustments and how much is a sustained increase in underlying inflationary pressure. The monthly CPI does not provide enough information to confirm this in either direction.
Housing costs (rents and dwellings) remain well contained despite the stronger than expected increase in utilities. Nevertheless, there is some concern with market services coming in on the high side. This means the RBA will continue its hawkish rhetoric.
However, both the labour market and wages are softer than what the RBA expected so while the risk of a November rate hike remains, this is not our base case and we expect the RBA to remain on hold this year.
July CPI in more detail
After back-to-back declines (–0.7%mth in May and –0.1%mth in June), the July CPI rose 1.0%mth (1.0%mth) and 3.5%yr, above both our forecast and market expectations of 0.8%mth and 0.9%mth, respectively. The six-month annualised pace (of the seasonally adjusted CPI) is running at a solid 3.9%yr pace, the fastest pace in the very short history of this series (from April 2024).
Meanwhile, core measures of inflation were also stronger than expected. TM inflation rose 0.5%mth (0.49%mth) and 3.5%yr, on par with the strongest monthly read in the series’ history. The result was also stronger than both our and the market’s expectations of 0.4%mth and 3.5%yr.
The largest contributors to the monthly headline read were automotive fuel (0.3ppts), domestic holiday & travel (0.2ppts) and audio, visual & computing equipment which saw a 7.7%mth jump contributing 0.1ppt. There was also a larger than expected increase in alcohol & tobacco of 1.2%mth but the contribution was just 0.08ppt. The largest detractor in the month was international holidays which unexpectedly fell 2.5%mth, shaving off 0.1ppt.
Market services excluding volatiles and holiday travel was up 0.8%mth against our expectations of 0.5%mth. We expected a strong number given the higher-than-expected minimum wage decision and survey measures suggesting stronger labour cost pressures, but the result exceeded even this.
Some key drivers of market services in the month included restaurant meals (1.2%mth), clothing repairs (1.0%mth) and audio, visual and media services (0.7%mth). Some components of recreational services also recorded above 1.5%mth reads. The key downside surprise here was insurance, which rose 0.2%mth following the 0.3%mth decline in June. More broadly, all but one component of market services (ex-volatiles & holidays) are running above the RBA’s target band on a year-ended basis.
New dwelling costs came in line with expectations rising 0.4%mth, with the year-ended pace softening slightly to 5.7%yr. We expect the disinflation to progress slowly here with above-average price changes by trade material suppliers. But a sustained downturn in established market will limit developers’ pricing power. Rents were slightly stronger, lifting 0.4%mth/3.6%yr against our expectation for a 0.3%mth/3.5%yr rise; the seasonally adjusted rise was 0.3%mth. The strength is consistent with tight vacancy rates. We continue to closely watch housing costs as they are an important driver of core domestic inflationary pressure.
More broadly, the breadth of inflation widened in July with the share of the basket running above 3%yr lifting slightly to just above 45% from 43% in June and 42% a year ago. We also saw the share running below 2%yr fall to 37% from 42% in June so we can’t deny it is possible that inflationary pressures are picking up.
Upside surprises
Household textiles was the key surprise rising 11.5%mth vs 2.9%mth. This is more noise than signal, reflecting bounce-back from a changed timing of sales periods and discounting.
Audio, visual and computing rose 4.2%mth against expectations of a 0.9%mth rise. Equipment was the key miss (7.7%mth vs 1.5%mth), but services also surprised 0.7%mth vs 0.3%mth).
Domestic travel rose 6.2%mth vs 3.0%mth.
Automotive fuel rose 7.5%mth following the partial unwinding of the fuel excise cut in July to 16c/l. We had expected a 5.1%mth rise.
Restaurant meals rose 1.2%mth vs 0.8%mth.
Therapeutic appliances rose 2.6%mth vs 0.4%mth, with dental services also surprising 0.9%mth vs 0.5%mth.
Downside surprises
- International travel was the key downside miss -2.5%mth vs 3.5%mth.
- Fruit & vegetables both fell -1.7%mth (0.3%mth exp) and -0.1%mth (0.8%mth exp), respectively.
- Insurance rose 0.2%mth vs 0.8%mth.
On face value, the July CPI presents an upside risk to our estimates for the September quarter inflation release but just how much is unclear at this stage. We are processing the more detailed data in today’s release and will advise our readers of any changes in a more substantial note.
What does this mean for the RBA?
An upside surprise in both headline and core measures of inflation will keep the RBA alert to the risks of domestic inflationary pressures and hence, they will maintain the hawkish rhetoric of late. However, one month is not a trend. The RBA will wait for a full update on core inflation from the September quarter CPI to get a clearer picture on just how much of today’s surprise was due to firms adjusting prices to the larger than expected increase in awards/minimum rates of pay, and so a once-off adjustment, and how much is due to more fundamental inflationary pressure. As such, we maintain the view that while a November rate hike remains a risk, we do not see it as our base case.
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