Australia's headline inflation rate climbed to an annual rate of 4% in August , up from 3.5%, giving the Reserve Bank some vindication for its decision to raise interest rates a day before the figures were released.
Author
- Isaac Gross
Lecturer in Economics, Monash University
But beneath that headline, the case for another hike was less clear. Underlying inflation, which strips out volatile items, remained steady at 3.6% over the year.
The Australian Bureau of Statistics said higher petrol prices helped drive the increase.
But annual price pressures were hardly confined to the bowser: housing costs rose 5.7% due to rising construction costs, education was up 4.7%, and food and non-alcoholic beverages rose 3% over the year to August.
The RBA had to make an early call
When trying to save a penalty kick in soccer, a goalkeeper cannot simply wait to see exactly where the ball is going. By then it will be too late. They generally have to commit to diving left or right, before the kicker has made contact with the ball. Choose correctly and they can be a hero. Choose wrongly and they can be left sprawled on the grass as the ball sails into the opposite corner.
The RBA found itself in much the same position on Tuesday. Its interest rate decision was due one day before the Bureau of Statistics released the August inflation figures.
The central bank had to figure out if it should raise interest rates before the ABS kicked the inflation numbers online.
The RBA decided to hike interest rates for the fourth time this year, assuming inflation would remain strong when the new figures were totted up by the ABS.
And that decision was mostly vindicated.
Fuel prices are still elevated
A large part of the increase in prices during August came from petrol. Automotive fuel prices surged almost 15% in a single month, largely reflecting higher global oil prices due to the conflict in the Middle East and the unwinding of the government's remaining fuel-excise relief .
Volatility in petrol prices is not uncommon. In fact it is one reason why central banks often ignore changes in energy prices, as even a sharp increase in one month can just as easily reverse itself a month or two later.
What the RBA worries about more is whether those initial price increases spread through the rest of the economy and become a persistent rise in the prices of domestically produced goods and services.
On those measures, the August figures were less alarming. Once volatile components such as petrol and fresh food are stripped out, prices were flat across the month.
Underlying inflation was steady
Measures designed to capture domestically generated price pressures also showed substantially less momentum than the headline figure would suggest.
The RBA's preferred measure of underlying inflation, the trimmed mean inflation rate, also moderated in August. The trimmed mean effectively strips out the unusually large price increases and falls each month to provide a better indication of the underlying trend.
Annual trimmed-mean inflation was unchanged at 3.6% in August: still uncomfortably above the RBA's 2-3% target, but importantly, no higher than it had been in June and July.
One swallow does not make a summer. A steady underlying reading beneath the headline numbers is nowhere near enough to declare Australia's inflation problem solved.
But nor does a headline inflation rate of 4% necessarily mean underlying inflation has suddenly taken another turn for the worse.
For the RBA, that distinction could be enough to justify some patience.
It has already raised interest rates four times this year, and those increases take time to flow through the economy.
If the measures of inflation that are more closely associated with persistent domestic price pressures continue to moderate, the RBA may prefer to wait and see how those earlier increases work their way through the economy rather than automatically following September's hike with another one in November.
So what happens in November?
The RBA's next meeting falls on Melbourne Cup Day, November 3. Before then, it will receive another read on the labour market and a fresh set of inflation figures.
Those two releases are likely to be central to whether the RBA board follows September's increase with another hike or leaves rates on hold.
A stronger inflation reading, or a renewed decline in the unemployment rate, would put another rate rise firmly on the table. But if underlying inflation continues to moderate, or unemployment ticks higher again, the RBA may decide that September's increase has done enough for now and keep rates unchanged.
Isaac Gross does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
