Introduction

The Inflection Point of Australian Inflation Looms

Will Interest Rates Rise Next Week?

Expectations for the Next 1-2 Years Gradually Become Clearer

Today's release of Australia's CPI data was significantly lower than expected. Numerous signs are indicating that the inflection point of Australian inflation is looming, and expectations for CPI and monetary policy over the next 1-2 years are gradually becoming clearer.

The Inflection Point of Inflation Looms

The CPI data announced today in Australia showed a faster decline than expected, with an increasing number of signs suggesting that the inflection point of Australian inflation is looming.

Firstly, the year-on-year increase in CPI for the second quarter was 6%, lower than expected.

From April to June in the second quarter, the year-on-year growth rate of Australia's CPI was 6%, which is lower than the market's general expectation of 6.2%, and also lower than the 7% recorded in the first quarter.It is worth noting that after reaching a recent peak of 7.8% in the fourth quarter of last year, Australia's inflation rate has fallen for the second consecutive quarter.

At the same time, the CPI increased by 0.8% quarter-on-quarter in the second quarter, which was lower than expected.

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Australia's second-quarter CPI growth rate was lower than the market's general expectation of 1%, and also lower than the 1.4% in the first quarter and the 1.9% in the fourth quarter of last year.

It is also pleasing that the 0.8% quarter-on-quarter growth rate of the CPI in the second quarter is the smallest increase since the third quarter of 2021.

If the quarter-on-quarter growth rate of 0.8% is taken as the benchmark, the annualized inflation rate is just over 3%, which is a bit unexpected.

Considering that the year-on-year growth rate of the CPI in June was also lower than in May.

Ignoring the quarterly data and looking only at June, the CPI increased by 5.4% year-on-year, which is not only lower than the 5.5% in May but also lower than the 6% quarter-on-quarter year-on-year growth rate, showing signs of Australia's inflation rate gradually decreasing.

It is worth noting that the growth rate of core inflation data in the second quarter is slowing down and is significantly lower than market expectations.

Previously, the Reserve Bank of Australia has repeatedly stated that core inflation data is still very worrying, or ordinary inflation data has fallen, but the core CPI data seems to be falling at a slower rate, but this time it is different.

In the second quarter, Australia's core CPI fell to 5.9%, even lower than the ordinary CPI of 6%.Finally, the growth rate of the CPI index by category is also slowing down significantly.

From a detailed perspective, the price index growth rate for most categories in the second quarter has slowed down noticeably, and there has been a pleasant surprise of up to 4-5 commodity price indices falling in a single quarter.

Thus, all current CPI trends are indicating that Australia's inflation rate is further slowing down.

Echoing the gradual decline in CPI is the gradual "weakening" of Australia's retail data, which is undoubtedly good news for controlling inflation.

A consumer confidence index published by ANZ has been below 80 for 14 consecutive weeks.

A reminder, even after the 2008 financial crisis and into early 2009, Australia did not experience such a prolonged period of low consumer confidence.

Furthermore, compared to the retail data in the fourth quarter of last year, the retail data for the first two quarters of this year is also very poor. The retail sales of many non-essential consumer goods have even shown a noticeable decline.

Therefore, whether it is from the retail data itself, consumer confidence itself, or the increased difficulty of mortgage repayments due to the latest consecutive interest rate hikes, all signs are showing that the consumption willingness of the vast majority of Australian families is relatively weak in the next 6-12 months. Superimposed on the CPI data that has already entered a downward cycle, we can judge that in the next few quarters or the next 1-2 years, Australia's inflation should gradually show a more noticeable downward trend.

Analyst James McIntyre even predicts that Australia's inflation rate will return to the midpoint of the 2%-3% target range in the third quarter of next year.

Will there be another interest rate hike next week?The increasingly downward CPI data will greatly influence the Reserve Bank of Australia's (RBA) monetary policy in the coming period.

If we look at the interest rate decision of the Australian central bank last month, as well as the minutes of the rate meeting released thereafter, the RBA's stance was actually more dovish than many market expectations. The attitude at the time was "there might be a need to tighten monetary policy in the future, or there might not be."

In terms of today's CPI trend, the probability of the central bank raising interest rates next week is significantly decreasing.

The core issue of whether to raise interest rates next week lies in the inflation data itself. The latest inflation data, both for June and the second quarter, show a downward trend, and both are far beyond market expectations.

Currently, whether it is CPI, consumer confidence, or retail data, all are below expectations. From these signs, we can draw a conclusion: the probability of the Reserve Bank of Australia raising interest rates next week has significantly decreased.

The reaction in today's primary market also indicates this.

After the CPI data was released, we can see that Australia's government bond yield curve has noticeably declined. A decline in government bond yields is a very clear indication of a decrease in future interest rate expectations. In addition, the Australian stock market has risen, and the Australian dollar has experienced a relatively large short-term depreciation.

All these signals are pointing to a high likelihood that the Reserve Bank of Australia's interest rate meeting next week will not proceed with an interest rate hike. If this comes to pass, it will be the first time since Australia entered the interest rate hiking cycle that there has been no rate hike for two consecutive months.

This is, of course, good news for the Australian economy and Australian households.

However, is there a possibility that the inflation pressure, which has shown a continuous downward trend, could turn around and rise again in the future? We believe that there is indeed a possibility of this happening.Based on the inflation data released this morning, there are still some underlying concerns, especially in two core areas where the pace of price increases has not completely stopped. One is the service sector related to insurance and finance, where the price increase is still significant. The other is the price of housing, whether it's rent or the cost of buying a house, the growth rate is also quite high. In these two areas, the core of high service inflation actually comes from employment. This is because the core cost of the service industry is wages, and currently, the employment situation in Australia is still very hot, with the unemployment rate remaining low.

However, we also need to recognize that employment is the slowest to respond to all economic trends in the entire economic cycle. If inflation has just started to slow down and the effect of interest rate hikes is gradually taking effect, it will still take some time to be transmitted to the job market. From recent news and internal research by the Reserve Bank of Australia, they believe that the unemployment rate in Australia will gradually rise in the future.

That is to say, whether the unemployment rate can rise in the future and whether the growth of wages can slow down will greatly affect the direction of the CPI, thereby affecting the monetary policy decisions of the Reserve Bank of Australia.

As for the rise in housing prices and rental prices, we tend to believe that this is more due to the insufficient supply in the housing market. We have mentioned this many times in previous activities and videos.

Here, we would like to give a special preview that we have conducted a more in-depth research report on the imbalance of housing supply and demand, which will be officially released in the next one or two weeks. If you are interested, you can also private message the editor to reserve a download. Due to such a very special housing market, it may even produce some unique investment opportunities, which we will also mention in the report.