Australia's Inflation: No Surprises
Introduction:
Core inflation remains stable, with initial signs of a downward trend emerging
Service industry inflation takes the lead, with detailed data revealing subtle changes
Similar to the US inflation trajectory? Expectations for interest rate hikes cool down
The latest inflation data released yesterday morning by the Australian Bureau of Statistics has injected a "reassuring shot" into the market. Although inflation remains high, it is in line with the market's general expectations. In contrast, looking at the weak performance of other Australian economic data, we believe that barring any surprises, the expectation for the Reserve Bank of Australia (RBA) to raise interest rates in the short term will be completely shattered! And last night's expectation from the Federal Reserve for a rate cut in September once again proves our point.
Core inflation remains stable, with initial signs of a downward trend emerging
According to the latest Australian Q2 and June inflation data released, Australia's inflation level remains high. The Q2 inflation rate reached 1%, and it increased by 3.8% compared to the same period last year. This figure, although astonishing, did not exceed the market's general expectations.
Similarly, the monthly inflation rate for June was 0.4%. Although not low, it was unexpectedly milder than some market expectations. Behind this, it may be that the market has already prepared for the continued high inflation and also reflects a rational understanding of the current economic situation.
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It is particularly worth noting that the quarterly data, which the Reserve Bank of Australia cares most about, did not show signs of further deterioration in inflation. In the quarterly data, service industry prices, as the main driver of current inflation, although remaining at a high level, did not show an accelerated increase.This stable trend is undoubtedly a positive signal for the market. It implies that, despite the continued presence of inflationary pressures, over time, it may gradually find its downward path, much like inflation in the United States.
However, other economic indicators beyond inflation data are less optimistic. For instance, the retail data released during the same period appears to be quite poor, further highlighting the weak momentum of the Australian economy.
Against this backdrop, both the Reserve Bank of Australia (RBA) and numerous economists generally feel the pressure of a slowing economy. Therefore, the current economic conditions do not support the decision to hastily raise interest rates, and we judge that the RBA is no longer in a hurry to take further rate-hiking measures.
Service sector inflation dominates, with detailed data revealing subtle changes
The detailed data released this time once again confirms the dominant position of service sector inflation in Australia's inflation.
Among them, price inflation in areas such as rent, financial insurance, healthcare services, and education still hovers in the range of 5% to 6%, showing the strong inertia of service sector inflation. However, compared to the highest levels of 7% and 8%, there has been a decline.
However, compared to the past few quarters or even months, the gap between the increase in service sector inflation and the rise in goods prices is gradually narrowing. This change may indicate that the inflation structure is undergoing a quiet adjustment.
If we further analyze the data, we find some interesting details. In this data, the highest inflation was actually driven by clothing and footwear products. This result may be surprising because the prices of these products often have large quarterly fluctuations and are difficult to maintain for long-term continuous growth. This anomaly may be related to various factors such as seasonal demand and changes in consumer preferences.
On the other hand, the prices of fresh food and other goods have also risen, but this is more related to short-term influences such as weather and seasonal factors. In the second half of the year, due to the impact of the tail effect, the prices of some goods and services are expected to be controlled, and inflationary pressures may be somewhat alleviated.
Similar to the trajectory of U.S. inflation? Cooling expectations for interest rate hikesIn the context of the current global economy, which is complex and ever-changing, Australia's inflation trajectory is likely to exhibit similarities to that of the United States—after an initial sharp decline, followed by a minor rebound and some stickiness, there may be a new round of downward movement within the next three to four months.
Should this downward trend materialize as expected, at that time, the Reserve Bank of Australia (RBA) will seriously and thoroughly discuss the necessity and feasibility of lowering interest rates. This scenario aligns with the U.S. inflation and the Federal Reserve's policy direction, and both may adopt similar strategic adjustments in response to inflation challenges.
Therefore, for investors, the Federal Reserve's latest interest rate decision influences the decisions of central banks worldwide. Late yesterday, the Federal Reserve announced that it would keep interest rates unchanged at between 5.25% and 5.5%. According to Powell, as long as inflation continues to decline, a rate cut is imminent, and the Federal Reserve may announce a rate cut at its meeting in September this year.
A careful study of the Federal Reserve's meeting documents reveals some changes in wording. The phrase "the Fed is particularly concerned and vigilant about high inflation" has been omitted, which indirectly indicates that the market has not changed much and is basically in line with expectations.
Thus, as U.S. inflation enters its second wave of decline and gradually approaches the target range set by the Federal Reserve, the market widely expects the Federal Reserve to take the first step in lowering interest rates soon. This key decision will not only profoundly affect the U.S. economy but also serve as a global market benchmark.
Returning to Australia, although the release of yesterday's inflation data triggered a short-lived rebound in the stock market and a temporary decline in the Australian dollar, this is more of a one-time correction to short-term expectations of interest rate hikes in Australia. In the long term, the core factor affecting the global market trend remains the dynamics of the U.S. market.
Considering the situation in both countries, due to the similar trajectory of Australian and U.S. inflation, Australia is likely to enter a period of waiting for interest rate cuts next. We predict that as Australian inflation data continues to move downward, the RBA may decide to cut rates at the beginning of next year.
However, the future policy of the RBA still largely depends on the actual performance of economic data, such as core data like inflation and employment. We need to closely monitor these changes in order to better grasp economic dynamics and provide a reference for long-term investment decisions.
When making any investment, please consider the applicability of the information contained in this article based on your personal investment objectives, financial situation, or personal needs, make decisions cautiously, and bear the risks yourself.
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