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What today’s inflation data means for interest rates

The latest CPI data doesn’t warrant anything more aggressive than the RBA’s recent 50 basis point moves, says Pendal’s head of cash strategies STEVE CAMPBELL

INFLATION data for the second quarter came out in line or slightly weaker than expectations today — and the market rallied in response.

The release itself is not enough to warrant anything more aggressive from the Reserve Bank than the 50 basis point raises at its past two meetings.

The risk of a 75bp move had risen after exceptionally strong labour data earlier in the month — and given aggressive moves from other central banks (Bank of Canada going 100 basis points, and the Fed will likely go 75 basis points early tomorrow).  

Consumer Price Index (Jun 2022 quarter)ActualConsensusPriorRevised to
Headline inflation (quarterly):1.8%1.9%2.1%
Headline inflation (annual):6.1%6.3%5.1%
Trimmed mean inflation (quarterly):1.5%1.5%1.4%1.5%
Trimmed mean inflation (annual):4.9%4.7%3.7%
Weighted median inflation (quarterly):1.4%1.5%1%
Weighted median inflation (annual):4.2%4.3%3.2%3%
Source: Australian Bureau of Statistics

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Here are some key data to note from the ABS for the quarter:

  • Goods drove 80% of the increase
  • New dwelling prices recorded their biggest annual rise since the series started in June 1999 due to high levels of construction, shortage of labour and materials
  • Fuel prices rose over the quarter despite the 22c/litre reduction in the fuel excise as the oil price moved higher due to the war in Ukraine
  • International travel and accommodation rose 20%
  • Domestic travel and accommodation rose 1.7%. Accommodation vouchers from the NSW and Victorian Governments partially offset the increase
  • Demand for durable goods remains strong despite higher prices from supply constraints and freight costs
  • Rents in Sydney and Melbourne were positive over the quarter, though still lower than a year ago
  • Other capital cities have recorded strong rise in rents: Darwin (11.4%), Perth (9.1%) and Canberra (5.1%) lead the charge
  • Clothing and footwear was up 3.5% due to freight costs
  • Child care costs fell 7.3% due to government subsidies

The following graph of Bloomberg data shows the weighted median and trimmed mean inflation:

Source: Bloomberg

After the release bank bill futures rallied by about 16 basis points in the front end, as you can see below.

The limited reaction further out the curve is due to thin liquidity further out and nothing trading.

Source: Bloomberg

The RBA is unlikely to be resting easy following the release today.

Inflation is still well above its 3% upper target band and is moving the wrong way.

This won’t be enough to warrant a 75bp lift in August, however.

The next key data release will be the Statement on Monetary Policy in early August, which will include updated forecasts.

Some of these forecasts will be referenced at the RBA’s August monetary policy decision. Governor Phil Lowe has previously referenced inflation for 2022 being around 7% following a surge in commodity prices.


About Steve Campbell and Pendal’s Income and Fixed Interest team

Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.

Find out more about  Pendal’s cash funds:

Short Term Income Securities Fund

Pendal Stable Cash Plus Fund

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here


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