RBA risk falling below inflation target band when quarterly CPI numbers released

HIA Chief Economist Tim Reardon correctly predicted a rate hold in July. Picture: Tertius Pickard

---

ANALYSIS

Pressure is mounting on the RBA to slash rates at its August meeting after the ABS’s June quarter inflation report revealed annual CPI had dropped to 2.1 per cent.

The quarter showed a rise of just 0.7 per cent, on the back of the 0.9 per cent, 0.2 per cent and 0.2 per cent of the three previous quarters.

While 2.1 per cent represents the headline CPI figure, the RBA likes to observe the rimmed mean, which cuts certain volatile items out of consideration.

The trimmed mean is now at 2.7 per cent, its lowest level since 2021.

The RBA now faces a “real risk” of inflation dropping below its preferred target band of 2-3 per cent if the trend continues.

Such an outcome would shine a further spotlight on the central bank’s decision to hold the cash rate steady at its April and July meetings.

Speaking ahead of the latest inflation release, SQM Research founder Louis Christopher said anything below 0.9 per cent for the quarter would see annual inflation “drop to the bottom of the RBA’s target band.”

“If it gets below 2 per cent, they will immediately have egg on their faces and if they then don’t cut in August, someone needs to lose their job,” he said at the time.

MORE:Shock plan that could save 30k jobs

All eyes will be on RBA Governor Michele Bullock after the release of quarterly inflation data. Sydney. Photo: Gaye Gerard

---

Why is the quarterly data more important than monthly?

Every month, the ABS releases an inflation report.

The most recent one, looking at May data, showed annual inflation at 2.1 per cent.

While that seems about as “in” the RBA’s inflation target band of 2-3 per cent as you could be, that data was not seen as reliable enough for the RBA because it only considers 43 out of a possible 87 ‘expenditure classes’.

This is why the RBA decided to hold and wait for the more comprehensive quarterly figures. Buried beneath the noise of those calling for a July rate cut, a few economists were on the money.

MORE:Bombshell way RBA rate calls are backfiring

SQM Research director Louis Christopher

---

MORE:Aussie suburbs with pre-Covid property prices

“Unemployment still low and the RBA will prefer to see the official quarterly CPI data at the end of July,” predicted Tim Reardon of Housing Industry Association (HIA) in Finder’s regular survey of economists.

Dr Nalini Prasad. Picture: Supplied

---

“I think the RBA will wait and see what happens in the next quarterly CPI before making any decisions about the path of interest rates,” said Dr Nalini Prasad of UNSW Sydney at the time.

And ‘waiting and seeing’ is what the RBA does best. However, a large investment into ABS tech and data gathering capability means that from November this year, the monthly data will include the full complement of expenditure classes, meaning the central bank will regularly get numbers it finds more reliable and can hopefully act more decisively.