Australia's Cooler Core Inflation Spurs Rate Cut Speculation

Australia's core inflation decelerated unexpectedly in the second quarter, bolstering the Reserve Bank of Australia's (RBA) view that price pressures will gradually ease. The trimmed mean inflation measure, which excludes volatile items, increased by 3.9% from 4% in the previous quarter. The consumer price index (CPI) rose by 3.8% year-on-year through June, in line with market expectations. This cooling in prices has led traders to increase bets on an interest-rate cut, resulting in drops in both the currency and bond yields.

Traders are now predicting a significant chance of a rate cut by December, shifting away from previous expectations of further rate hikes. The RBA has raised interest rates by 425 basis points since May 2022 to control inflation but has been more cautious compared to global counterparts due to concerns about the impact on heavily indebted households. The decline in core inflation suggests that the RBA may be on track to meet its goal of bringing price gains back to the 2-3% target range by late next year without additional tightening measures. The most significant contributors to the CPI increase in the June quarter were housing, and food and non-alcoholic beverages.