Follow up hike anticipated for Melbourne Cup Day as core inflation tracks for 1.0% in Q3.
Headline inflation jumped to 4.0% in August, from 3.5% in July. The lift was driven by a 14.8% rise in automotive fuel prices over the month, reflecting both higher global oil prices and the roll-off of the remaining fuel excise relief. Underlying inflation was steadier with the annual trimmed mean holding at 3.6% for a third straight month, and the 0.2% monthly rise coming in below the 0.3% consensus.
Today's data keeps a high Q3 inflation reading on track. After incorporating August’s data, our forecast remains for Q3 trimmed mean inflation of 1.0%, which is 0.2 percentage points above the RBA's August Statement on Monetary Policy projection.
Housing costs were mixed. New dwelling costs rose just 0.16% over the month, a welcome reprieve from the recent run of strong increases despite the supply-side headwinds facing the sector. Rents went the other way, with the seasonally adjusted monthly growth lifting to 0.32%, the highest reading in 2026 thus far and in line with the growth in advertised rents.
We continue to expect the RBA to hike again in November, taking the cash rate to 4.85% on Melbourne Cup Day. With ongoing risks in the economy predominantly to the upside (higher inflation), we expect a Q3 inflation reading of 1.0% would be far enough above the RBA's current forecasts to warrant a further increase in the cash rate. Another hike in February next year remains a real possibility but will be contingent on activity levels and what transpires abroad over summer. A November move buys the RBA Board time to watch and assess whether the tightening already delivered is enough to get the job done. The RBA will not want to lift rates any further than it needs to, given its aim of preserving the strong post-pandemic labour market outcomes.
Markets are not convinced. Bond prices climbed on the trimmed mean undershoot, extending the move that followed Governor Bullock's comment yesterday that the Board hopes the four rate hikes delivered so far will prove sufficiently restrictive. A November hike is now priced at around 25%, with ~33bps of tightening priced by June 2027, which we believe underprices the near-term risk. - Courtesy Judo Bank Economics
