Sticky Inflation Reinforces RBA’s Decision to Raise Rates
Latest CPI data shows inflation remains elevated, adding pressure on the Reserve Bank to keep monetary policy focused on bringing price growth back towards target
Australia’s latest inflation data has reinforced the case for the Reserve Bank of Australia’s decision to raise interest rates, according to KPMG chief economist Brendan Rynne. He said the latest numbers demonstrate that inflation remains stubborn and that the RBA’s policy response will need to remain focused on the outlook rather than simply the inflation rate recorded in the past.
Rynne said the latest CPI figures were broadly consistent with concerns raised by RBA Governor Michele Bullock before the rate decision. He noted that the data reflects inflation conditions in August, while monetary policy needs to be set according to where inflation is expected to move in the months ahead.
Inflation remains difficult to contain
According to Rynne, the latest inflation figures show that price pressures have not yet returned to a level consistent with the RBA’s 2.5% midpoint target.
He argued that the persistence of inflation could require stronger policy action, with both monetary and fiscal policy playing a role in bringing price growth down. In his view, the latest CPI release supports the RBA’s decision to lift rates because inflation remains well above the level policymakers are targeting.
The data also adds to the focus on domestic demand and the labour market. The RBA has been looking for a moderation in demand as part of the process of reducing inflationary pressure.
Labour market becomes increasingly important
Rynne highlighted the connection between unemployment and inflation, pointing to comments from Governor Bullock that the unemployment rate may need to move into the 5% range for domestic demand to slow enough to reduce inflation.
The latest inflation data, he argued, provides further support for that concern. He pointed to Melbourne, which recorded the lowest capital-city inflation outcome at 3.5%, while also having the highest unemployment rate among the capital cities at 5.2%.
The comparison suggests that weaker labour-market conditions may be associated with softer inflation, although the broader relationship between employment, demand and prices will remain a key consideration for policymakers.
What it means for investors
For investors, the latest CPI result keeps inflation and interest rates at the centre of the Australian market outlook. Persistent price pressures could influence expectations around the RBA’s future policy settings, while a further cooling in demand and employment would be important signals for the inflation trajectory.
The key issue now is whether inflation begins to ease towards the RBA’s target or remains elevated for longer, potentially requiring tighter financial conditions across the Australian economy.
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