Australian shares pushed higher on Wednesday, with the S&P/ASX 200 climbing 0.92% to close at 8,789.30. The gain came despite a fresh reminder that inflation is still running hot: the consumer price index (CPI) rose 4% in the 12 months to August, up from 3.5% in the year to July.
The market's resilience was notable given that a hotter inflation reading typically dents hopes for interest rate cuts. Investors had been positioning for the possibility that the Reserve Bank of Australia (RBA) might start easing policy next year, but Wednesday's data complicates that picture.
Inflation heats up, but the economy shows cracks
The acceleration in annual CPI to 4% was driven largely by higher fuel and housing costs, as Australia's inflation ticked up in August. While the RBA has kept its cash rate at 4.35% since late 2023, this latest print suggests price pressures are far from vanquished.
At the same time, other data released Wednesday pointed to a slowing economy. Dwelling approvals fell 6.1% in August, a sign that high borrowing costs are weighing on construction and housing supply. Total credit growth, meanwhile, held steady at 0.6% for the month, indicating that while borrowing isn't collapsing, it isn't accelerating either.
This mixed picture—sticky inflation on one hand, softening activity on the other—leaves the RBA in a tough spot. If inflation stays above target, the central bank may be reluctant to cut rates anytime soon. But if the economy weakens further, keeping rates high for too long could deepen the slowdown.
ASIC to review banks' use of AI
Investors also had to digest news that the Australian Securities and Investments Commission (ASIC) will review how banks use artificial intelligence with customers. The regulator's move signals growing scrutiny of AI in financial services, particularly around issues like algorithmic decision-making and potential bias.
For banks, this could mean additional compliance costs and closer oversight of their technology systems. It's a reminder that while AI promises efficiency gains, it also brings regulatory risks. The review is likely to focus on whether banks are using AI in ways that treat customers fairly and transparently.
What it means for investors
For everyday investors, Wednesday's session offers a few takeaways. First, the ASX's rise shows that markets can look past bad news when sentiment is supportive—but that doesn't mean the risks have disappeared. Inflation running at 4% is well above the RBA's 2-3% target band, and if it stays elevated, rate cuts could be delayed further.
That matters for your portfolio because interest rates influence everything from mortgage costs to the valuations of growth stocks. Higher-for-longer rates tend to pressure companies with high debt loads and make bonds more attractive relative to equities.
Second, the drop in dwelling approvals is a warning sign for the housing sector and the broader economy. Fewer approvals today means less construction activity down the track, which could weigh on economic growth and employment. For investors in property-related stocks or building materials companies, this is a trend worth watching.
Third, the ASIC review of AI in banking is a reminder that regulatory risk is a real factor for financial stocks. While the review is unlikely to derail the sector, it could lead to new rules that affect how banks operate and what they can do with customer data.
Globally, the picture is similarly mixed. In the US, Fed officials have kept the door open to another rate hike as inflation risks linger, while stocks slipped as the 10-year Treasury yield hit 5.29% and consumer confidence dropped. Meanwhile, in Asia, Japan's August retail sales growth cooled as consumer spending softened, and China's targeted credit easing lifted stocks but not property.
For Australian investors, the key question is whether the RBA will be forced to act on inflation. The next monthly CPI print and the central bank's own forecasts will be closely watched. Until then, expect volatility as markets try to price in the path of rates.
As always, it's important to remember that short-term market moves are not a reason to overhaul your long-term strategy. Instead, use days like this to review your portfolio's exposure to interest-rate-sensitive sectors and ensure you're comfortable with the level of risk you're taking.
