Australia CPI Preview: Inflation data could challenge RBA tolerance

• The Australian Monthly Consumer Price Index is forecast to rise to 5.4% in September, up from the 5.2% recorded in August.
• The Quarterly CPI is expected to show a decline in the annual inflation rate from 6% in the second quarter to 5.3% in the third quarter.
• The figures will be critical for the Australian Dollar ahead of the November RBA meeting. 

The Australian Bureau of Statistics (ABS) will release two reports on inflation on Wednesday at 00:30 GMT. These reports include the quarterly Consumer Price Index (CPI) and the monthly CPI. These numbers will be crucial for the Australian Dollar (AUD) ahead of the Reserve Bank of Australia (RBA) meeting scheduled for November 7.

Inflation in Australia is expected to remain above the RBA’s target range of 2%-3% during the third quarter. Since reaching its peak in December 2022, when the monthly rate showed an 8.4% annual increase, inflation has been trending down. The upcoming inflation numbers on Wednesday could indicate that the quarterly annual rate is at its lowest since the first quarter of 2022 or even the fourth quarter of 2021.

However, there is a possibility that the pace of inflation during the third quarter might have accelerated, potentially reaching the "failure to make satisfactory progress" threshold mentioned by the RBA in its latest meeting. This could signal the potential for another rate hike. Market participants will closely monitor these numbers.

What to expect from Australia’s August inflation rate numbers?

On Wednesday, ABS will release the Consumer Price Index (CPI), which is a quarterly measure of inflation, as well as the monthly CPI. According to the RBA, the monthly CPI is considered more timely as it includes updated prices for around two-thirds of the CPI basket each month.

The Consumer Price Index is expected to show a 1.1% increase during the third quarter, an acceleration from 0.8% in the second quarter. This rise is attributed to higher fuel and electricity costs. The annual inflation rate is expected to decline from 6% to 5.3%. The Trimmed Mean CPI, a core inflation measure that excludes the most volatile items, is projected to rise by 1.1% in the third quarter, with the annual rate slowing from 5.9% to 5%.

The Monthly CPI is anticipated to show a rebound in the annual rate, increasing from 5.2% in August to 5.4% in September, which would be the highest level since June.
If the numbers align with expectations, the RBA would welcome the decline in the core inflation measure. However, higher headline inflation figures could raise concerns and challenge the RBA's tolerance for inflation to remain above the target range. Even if the numbers match market consensus, it could trigger expectations of another rate hike from the RBA before the end of the year.

The next monetary policy meeting is scheduled for November 7. Currently, the interest rate market suggests that the probability of a rate hike is below 25%, but it climbs to nearly 50% for the December meeting. Higher inflation figures could alter the entire outlook.

In her first prepared speech on Tuesday, RBA Governor Michele Bullock said that "the board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation. Our focus remains on bringing inflation back to target within a reasonable timeframe while keeping employment growing."

In its latest statement, the RBA reiterated that the central forecast is for CPI inflation to continue declining and return to the 2-3% target range by late 2025. The meeting minutes noted that further policy tightening may be required if inflation proves more persistent than expected. The RBA Board “has a low tolerance for a slower return of inflation to the target than currently expected. Whether or not a further increase in interest rates is required would, therefore, depend on the incoming data and how these alter the economic outlook and the evolving assessment of risks.”

How could the Consumer Price Index reports affect AUD/USD?

The inflation numbers could significantly impact the Australian Dollar (AUD). If the numbers come in higher than expected, it would fuel expectations of another interest rate hike and strengthen the AUD. However, excessively high numbers may not be sustainably positive for the currency, as they could indicate the need for higher interest rates, potentially affecting the overall economy. Additionally, if the economic outlook worsens significantly, the RBA may have to prioritize controlling inflation even at the expense of other economic factors.

On the other hand, if inflation slows more than expected, it would suggest that there is no immediate need for the RBA to raise interest rates. This could be initially negative for the Australian Dollar in the short term. However, it could also indicate a more optimistic outlook for the Australian economy, with no requirement for further monetary policy tightening. As a result, the overall impact on the AUD could be positive.

The AUD/USD pair trades near year-to-date lows, with crucial support at 0.6280. A break below this level could trigger further bearish acceleration, potentially targeting the 0.6200 level and even the 2022 low of 0.6169. 

On the other hand, the pair is approaching a downtrend line and the significant 55-day Simple Moving Average (SMA) at 0.6410. A firm break above this level could strengthen the outlook for the Australian Dollar, potentially leading to further gains and a test of the 0.6500 level, which has been a notable resistance in previous months. A break higher could change the outlook from negative to neutral.