Key Points
- The RBA hiked its cash rate target by 25 basis points to 4.6% today.
- Monthly CPI jumped to 4.0% in August, up from 3.5% in July.
- A further rate hike is expected at the next RBA meeting.
- The ASX 200 rallied to test resistance at 8800.
The RBA has grown more hawkish since its last meeting, spurred by a sharp rise in diesel and petrol prices that threaten to feed through into higher prices.
The average diesel retail price increased to 286.7 cents last week, with the wholesale price rising to 273.5 cents per liter.
CPI jumped to 4.0% in August from 3.5% in July, while the trimmed mean held steady at 3.6%.
Tradables inflation (2.9%), reflecting prices for imported goods, rose sharply on higher fuel prices. Non-tradables (4.5%) reflect strong domestic inflation for services such as rent and education.
Annual inflation of 5.7 per cent for Housing reflected rising costs for both New dwellings and Electricity. New dwelling prices rose 5.4 per cent in the 12 months to August as builders passed on higher costs for materials and labour.
Transport was the second largest contributor to annual inflation in August, rising by 5.6 per cent due to higher automotive fuel prices.
On a monthly basis, Automotive fuel prices rose 14.8 per cent in August, compared to a rise of 7.5 per cent in July. This was driven by higher world oil prices and the unwinding of the remainder of the federal governments fuel excise relief measures in August. (ABS)
Nominal GDP slowed slightly to 5.3% for the June quarter.
Australian bond yields, at 4.95% for the 2-year and 5.25% for the 10-year, closely shadow nominal GDP growth, indicating the RBA is maintaining neutral monetary policy.
However, private credit is still growing at an annual rate of 8.4%, well above NGDP growth, suggesting that further tightening is necessary.
Westpac Chief Economist Luci Ellis says “the bar for a November rate hike is very low” and she now expects a further hike to 4.85%.
The ASX 200 shrugged off the rate hike, rallying to test resistance at 8800.
Conclusion
The cure for high prices is high prices. Credit growth will likely fall if the 2-year AGB yield rises above nominal GDP growth.
Diesel shortages in the coming months could do far more damage than a rate hike.
Acknowledgments
- ABS: Monthly CPI
- ABS: Australian National Accounts
- Westpac: RBA hikes with one more expected
- AIP: Weekly Diesel Prices Report
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.