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Inflation data no ‘smoking gun’: AMP economist

As Australia’s annual consumer price index has dropped to a rate of 6.8 per cent in August from 7 per cent the month earlier, economists review their cash rate predictions.

According to the latest data released on 29 September by the Australian Bureau of Statistics (ABS), Australia’s consumer price index fell to 6.8 per cent in August 2022 (year-on-year) from 7 per cent in July (year-on-year) — the second-highest quarterly lift since the GST was introduced.

The latest figures reported the construction industry continues to be a key driver of inflationary pressures, revealing that new dwelling construction lifted 20.7 per cent in August, which marked a fall from 22 per cent the month before.

In addition housing inflation dropped from 9.9 per cent to 9.5 per cent, year-on-year.

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The slight fall in the annual inflation rate from July to August was mainly due to a decrease in prices for automotive fuel, which saw “the annual movement for automotive fuel fall from 43.3 per cent in June to 15.0 per cent in August”, the ABS said.

The data comes ahead of the Reserve Bank of Australia’s (RBA) October rate hike next week, heating up the debate on what the next move will be. While some economists previously predicted another 50-bp hike was on the cards, the latest data has possibly moved the narrative.

AMP economist Diana Mousina said the CPI data was no “smoking gun” for a 0.50 per cent hike next week and instead “keeps the chance of a 0.25 per cent rate hike next week alive”.

“While we favour a 0.25 per cent rate hike next week, the risk is clearly that the central bank lifts the cash rate by 0.50 per cent in its fight to get inflation down,” Ms Mousina said.

The monthly data follows the decision by the bureau to report monthly inflation data, instead of its previous quarterly figures, in a bid to provide economists regular updates.

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However, Ms Mousina warned monthly data only included 73 per cent of the market, with key categories such as gas and electricity prices excluded.

“While the headline monthly CPI data looks less than expected, the data probably understates inflation,” Ms Mousina said.

“This will continue to be a problem for monthly CPI data, as some components are only surveyed quarterly.”

She said the monthly outcome was “slightly less than expected” and meant some “downside risk” to its September quarter forecast of a 1.8 per cent lift taking headline inflation to 7.2 per cent year-on-year.

While the central bank has based its argument for rising interest rates against its forecasted 7 ¾ inflation rate, Commonwealth Bank economist Gareth Aird said the latest figures will be welcomed “behind closed doors”.

“There was a risk that the inflation data today indicated the pulse of inflation accelerated or came in stronger than the RBA anticipated, Mr Aird said.

“But the data is likely to have come in below the RBA’s expectations.

“We stick with our call for the RBA to slow the pace of their tightening cycle at next week’s board meeting and to raise the cash rate by a ‘business as usual’ 25-bp.”

The central bank has remained resolute in the need to ensure inflation returned to target between 2–3 per cent while keeping the economy on an “even keel”.

The RBA’s September minutes revealed the board discussed the options of a 25 or 50-bp hike, before deciding on a 50-bp bump as “indicators pointed to inflation remaining high and broadly based in the September quarter”.

“High inflation was impinging on households’ real incomes and sentiment, and the rapid increase in interest rates would further weigh on aggregate household disposable income,” the RBA said.

[Related: October rate hike open for debate, amid RBA

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