The annual inflation rate climbed higher month on month in August 2023 for the first time in four months, according to the latest economic data.
The Australian Bureau of Statistics’ (ABS) monthly Consumer Price Index (CPI) indicator rose 5.2% in the 12 months to August 2023. This figure is higher than the 4.9% recorded in July 2023, but not as high as the 5.4% rate reported in the June 2023 monthly release. The monthly inflation rate in August 2023 is also lower than the quarterly figure for June, which was a flat 6.0%.
The biggest contributors to the August 2023 annual increase were housing (+6.6%), transport (+7.4%), food and non-alcoholic beverages (+4.4%) and insurance and financial services (+8.8%).
However, volatile price movements can distort the monthly CPI data drops. Volatile items include fruit and vegetables, automotive fuel, and holiday travel and accommodation. It can be helpful to exclude these items from the headline CPI indicator to provide a more accurate view of underlying inflation.
ABS head of prices statistics, Michelle Marquardt, said that if you exclude these volatile items from the monthly CPI indicator, the annual rise of 5.5% in August is lower than the annual rise of 5.8% in July.
The next round of quarterly CPI figures are due to be released at the end of October 2023, which could influence the RBA’s cash rate decisions in November 2023.
In April 2023, following three straight months of decline, volatile price movements caused headline inflation to jump unexpectedly. May's monthly indicator saw the pace of inflation return to its downward trend and continue diminishing until this month’s uptick. These statistical irregularities demonstrate the usefulness of the monthly data series.
How will this affect interest rates?
Since April 2022, the RBA has lifted the cash rate 12 times, taking it to 4.10%. In September 2023, the RBA kept the cash rate on hold for the third meeting in a row, leading three of the four big banks to believe that the cash rate has officially peaked. However, NAB is still predicting that one more hike may occur in late 2023, potentially following the release of quarterly CPI figures in October 2023. The banks also suggest that cash rate cuts could occur as early as March 2024.
The new uptick in inflation could potentially increase the risk that the RBA Board may decide to raise the cash rate at its October 2023 meeting to help encourage inflation to return to the RBA’s target band of between 2% and 3% on schedule. However, it's important to note that this relatively new monthly series is supplemental to the more authoritative quarterly CPI figures.
In his final statement on monetary policy as RBA governor in September 2023, Philip Lowe said inflation is still too high, with services inflation rising briskly and rent inflation also being elevated:
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks.”