Westpac, one of Australia's largest banks, expects the country's inflation rate to have picked up again in August. In a note released Monday, the bank forecast that monthly consumer prices rose 0.4% in August, lifting the annual inflation rate to 4% from 3.5% in July.
The forecast comes as households and investors alike keep a close eye on price pressures, which have been cooling gradually over the past year but remain above the Reserve Bank of Australia's (RBA) target band of 2% to 3%.
Headline vs. underlying inflation
Australia tracks two main measures of inflation. The headline rate reflects the overall change in consumer prices, while the 'trimmed mean' strips out the largest price swings in both directions to reveal the underlying trend. Economists and the RBA tend to focus on the trimmed mean because it gives a clearer picture of persistent price pressures.
Westpac said the headline number may look a bit hotter in the near term, and it raised its forecast for third-quarter inflation. However, the bank also expects underlying pressure to keep easing. It sees August's trimmed mean rising just 0.2% — below the average of the prior three months — which would leave the annual trimmed mean rate moving lower.
This split between headline and underlying inflation is not unusual. Temporary factors, such as volatile food or energy prices, can push the headline rate up even when the broader trend is cooling. In this case, Westpac's view suggests that while the monthly CPI print may grab headlines, the underlying picture remains one of gradual disinflation.
Why this matters for the RBA and your money
The RBA has kept interest rates on hold for several months after a rapid tightening cycle that lifted the cash rate to its highest level in over a decade. The central bank's decisions hinge on whether inflation is returning to target at a reasonable pace. A hotter-than-expected inflation reading could raise the odds of another rate hike, while a cooler one could pave the way for cuts.
For everyday Australians, the path of inflation directly affects mortgage repayments, savings rates, and the cost of living. If inflation proves stickier than hoped, the RBA may keep rates higher for longer, meaning borrowers face extended pressure. Conversely, if underlying inflation continues to ease, there is room for the central bank to consider easing policy later this year or in 2025.
Westpac's forecast suggests that the August headline figure might cause some short-term market jitters, but the bank's view on the trimmed mean indicates that the broader disinflation trend remains intact. Investors will likely focus on the underlying measure when the official data is released, rather than the headline number alone.
Global inflation backdrop
Australia is not alone in grappling with inflation dynamics. In the United States, recent data showed inflation heating up in August, complicating the Federal Reserve's next move. That has revived bets on further rate hikes, with global bond yields climbing as oil prices surge and fan inflation fears. Higher oil prices can feed into consumer prices worldwide, including in Australia, which imports much of its fuel.
Westpac's forecast aligns with this global theme: energy costs are a common culprit behind short-term inflation spikes. However, the bank's expectation that underlying pressures are easing suggests that the impact of oil may be transitory.
What investors should watch
For investors, the key date is the release of the official monthly CPI data from the Australian Bureau of Statistics. The market will scrutinize both the headline and trimmed mean figures. If the headline comes in at or above Westpac's forecast, expect some volatility in rate-sensitive sectors like real estate and financials. However, if the trimmed mean shows continued easing, the RBA may remain on hold, which could support equities.
It's also worth noting that Australian shares have been reacting to oil price movements and global inflation concerns. The interplay between oil, inflation, and central bank policy is likely to remain a dominant theme for markets in the coming weeks.
Westpac's note is just one forecast, and other economists may have different views. But it highlights the delicate balance the RBA faces: managing inflation without choking off economic growth. For now, the bank's expectation of easing underlying pressures offers some reassurance that the worst of the inflation surge may be behind us.
