July CPI data came in a touch above expectations, with headline inflation rising 1.0% MoM in original terms (0.6% in SA terms), with the annual rate easing to 3.5% from 3.8% in June but above the 3.3% Bloomberg consensus and our own 3.2% forecast. Trimmed mean inflation rose 0.5% MoM (SA), with the annual rate holding at 3.6%.
The data will complicate the RBA's thinking, especially after yesterday's board minutes, which flagged that risks to the inflation outlook remain skewed to the upside even as the bank held the cash rate steady at 4.35% earlier this month. The Aussie dollar jumped following the release,reflecting a reassessment of the near term policy outlook given the upside surprise.
Looking at the details, transport was the largest contributor to the monthly rise in headline inflation, with automotive fuel prices up 7.5% inJuly after three consecutive months of declines. This was due to higher oil prices through July, coinciding with the partial unwinding of the Federal Government's fuel excise relief measures. Housing was more mixed, falling 0.3% MoM in seasonally adjusted terms as electricity pricesfell 1.6%, though this masked continued underlying strength in newdwelling costs and rents (which both rose 0.4% MoM). Food and nonalcoholic beverages rose 0.3% through the month. On an annual basis,housing remained the largest contributor to inflation despite easing to 5.0% (from 6.8%), followed by food and non-alcoholic beverages, which eased slightly to 3.2% (from 3.3%).
A key concern for the RBA is that measures of underlying inflation picked up through July. Non-tradable (domestic) inflation, while easing to 4.4%YoY (from 4.9%), rose 0.4% MoM (SA) and continues to remain elevatedon a 3m annualised basis at 4.1%. More importantly, trimmed mean inflation, while holding stable at 3.6%, is now annualising on a 3m basis at 4.7%, which will add to the bank’s concerns following its comments inits recent minutes around persistent capacity pressures. Services inflation also remains a source of unease, rising 0.6% MoM (SA) and annualising at 4.6%, its highest level since October 2025. Additionally,core services also rose 0.9% MoM, following a 1% rise in June,suggesting growing stickiness in price pressures.
Overall, we maintain our view that the cash rate remains on hold at 4.35%through 2026 and into 2027, though today's data raises the risk that this view be tested. Coming a day after the RBA's August minutes flagged upside risks to the inflation outlook, the stronger than expected print atboth the headline and underlying level lends some validation to the Board's concerns and reinforces the case for continued caution. Indeed,the pickup in momentum across underlying and services measures suggests the disinflation process may prove bumpier than the RBA had hoped, and a further run of upside surprises would sharpen the case for another hike. However, this is not our base case.
