(US) – The unexpected increase in US consumer price data, driven by a spike in oil prices to a 10-month high, has raised concerns among Australian policymakers about the containment of inflation.
While financial markets didn’t react significantly to the figures, economists, including RBC Capital’s chief economist Su-Lin Ong, have noted potential warning signs for Australia in the data.
This concern is amplified by robust local job data, which suggests mounting inflationary pressures.
The US data revealed a 0.6% rise in headline inflation, the highest monthly increase in 14 months, primarily due to surging energy prices amid a tighter oil supply outlook.
Rising global energy prices are expected to impact Australia’s headline inflation figures, according to Ms. Ong.
The US core consumer price index, which excludes food and energy costs, also rose by 0.3% in August, marking its first acceleration since February. Year-on-year, it increased by 4.3%, the smallest gain in nearly two years.
RBA expected to emphasize decreasing inflation amid strong employment
Ms. Ong suggests that the Reserve Bank of Australia (RBA) will continue to emphasize that inflation is decreasing. However, concerns about services inflation and a tight labor market are likely to keep the RBA cautious.
Australian employment data released on Thursday showed a rebound in August, with the creation of 64,900 jobs, far surpassing the forecast of 23,000.
The unemployment rate remained steady at 3.7%, suggesting that the Australian economy is handling the 4 percentage points of cash rate increases imposed by the RBA since last year quite well.
Tim Hext, Pendal’s head of government bond strategies, believes that the RBA’s path to a soft economic landing may be at risk due to rising fuel costs.
He highlights that the primary near-term threat to the RBA’s wait-and-see approach is oil prices, particularly if they surpass $US100, which could reignite inflation in Australia.
Oil prices have reached a 10-month high following supply reductions by major producers such as Saudi Arabia and Russia. This has led to higher fuel prices, with spending at the petrol pump rising by 9.5% last month.
Economists suggest that the surge in fuel costs may necessitate another rate increase by the RBA. JPMorgan’s chief economist, Ben Jarman, anticipates one final rate increase to 4.35% alongside firmer near-term inflation numbers linked to energy prices.
Despite the Australian dollar briefly rising to US64.53¢ in response to the US inflation data, it later settled at US64.44¢, reflecting a 0.3% increase.
Bond prices experienced a slight rally, with the three-year bond down 2 basis points to 3.84% and the 10-year bond remaining steady at 4.11%.
While bond futures indicate a 56% probability that Australia’s cash rate has peaked at 4.1%, the uncertainty surrounding interest rates in both the US and Australia has left traders unsure about their future direction.
Christian Baylis, founder of Fortlake Asset Management, suggests that central banks are grappling with the decision of whether to maintain rates at current levels for an extended period or preemptively tighten policy.
He believes the RBA is inclined to keep the cash rate at 4.1% for an extended period unless there are signs of labor market loosening, which is currently not evident.
Holding rates steady for an extended period could result in the buildup of inflationary pressures, ultimately leading to higher interest rates, according to Mr. Baylis.
