RBA faces September rate hike after inflation spikes

CreditorWatch Chief Economist Ivan Colhoun said the latest trimmed mean inflation figures left the Reserve Bank of Australia with little choice but to raise interest rates at its September meeting. In his view, the result shifted the debate from inflation risk to inflation reality.

The monthly trimmed mean consumer price index for July rose 0.486% month on month and 3.6% year on year, ahead of market expectations for a 0.35% monthly increase and a 3.5% annual reading. Colhoun said the result was far above the pace needed to bring inflation back to the RBA's 2.5% target over time.

He said the monthly trimmed mean would need to average 0.2% month on month to be consistent with that target. July's outcome was more than double that rate and matched the highest monthly trimmed mean increase since July last year.

His remarks add to scrutiny of the central bank's next move as businesses and households continue to absorb higher borrowing costs and elevated energy bills. The RBA has kept a close focus on services inflation and other signs of domestic price pressure as it assesses whether policy is restrictive enough.

Colhoun pointed to broad-based price increases across services categories often watched as indicators of underlying inflation. He cited monthly rises of 0.6% in hairdressing, 0.9% in meals out and takeaways, 0.9% in dental services, 0.8% in vet services and 1.0% in drycleaning.

He linked those increases to wage decisions that took effect from 1 July, saying they had made the inflation task harder for policymakers. In his view, the extent and persistence of inflation above target meant a prolonged overshoot could no longer be defended.

"Today's extremely high monthly trimmed mean CPI really was not the result Australian businesses or households were looking for. It really leaves the RBA Board no option but to raise Australian interest rates further at the upcoming September Board Meeting. The Board is dealing not with upside inflation risks and cost pressures, but with upside inflation reality," Colhoun said.

He also highlighted a 7.7% monthly rise in audio visual and computing equipment prices. He said that could mark the start of demand-led inflation linked to artificial intelligence, as stronger buying interest pushes up prices in technology-related products.

While some of that increase may reflect temporary factors, including demand associated with major sporting events, Colhoun said technology prices had started to rise as AI-related demand creates shortages. He described that trend as demand-driven rather than supply-driven and said it strengthened the case for further monetary tightening in Australia and the United States.

The July figures contained few offsets, in his reading of the data. Electricity prices fell by less than expected, while increases in gas, water and sewerage charges outweighed that decline. Car prices also rose, though he said discounting in that market may still emerge in coming months.

One of the few more favourable moves was a non-seasonal decline in international airfares. Even so, Colhoun argued that too much of the inflation basket was still rising well above the pace consistent with the RBA's goal.

Housing and fuel

He also warned that the inflation backdrop could remain difficult in the near term. Petrol prices are likely to rise sharply in the next set of data, potentially by about 20% month on month, while rents and newly constructed dwelling prices both rose 0.4% in July.

That combination makes a meaningful near-term easing in the trimmed mean less likely, in his assessment. He noted that first-month quarterly readings can sometimes print higher than the following two months, but said the broader picture remained troubling.

Sector effects

Colhoun said some parts of the economy could still gain from the current investment cycle even as tighter monetary policy adds strain elsewhere. He identified mining, parts of construction and finance as sectors likely to benefit from the boom.

His view aligns with a wider split in the economy, with investment-linked industries continuing to attract spending while consumer-facing sectors face pressure from higher rates and stubborn household costs. For businesses, that means conditions may diverge more sharply depending on exposure to discretionary demand, wages and imported inputs.

Colhoun also referred to recent RBA board minutes, which he said showed clearly that further tightening remained under active discussion. In that context, he said the latest inflation result alone was strong enough to warrant another move.

"I can't see how the Board can credibly decide on anything but some extra tightening at the September Board Meeting," Colhoun said.