Key Points
- Australian CPI remains stubbornly high, with a 1.0% monthly increase in July.
- Trimmed mean CPI was unchanged at 3.6% on a year-on-year basis.
- However, the unemployment rate rose to 4.5% in July, suggesting the RBA is unlikely to raise rates.
Australian CPI remains stubbornly high, with the Trimmed Mean, the RBA’s favored measure, holding firm at 3.6% for the 12 months to July.
Headline CPI eased to 3.5% for the 12 months, but that reflects base effects from the 1.3% increase in July last year compared to a jump of 1.0% in July 2026.
Strong CPI in July increases the motivation for another RBA rate hike, but Justin Smirk at Westpac points out that the labor market is softening.
Unemployment rose to 4.5% in July, up from 4.4% in June.
Monthly hours worked declined by 12.5 million hours in July to 1,998 million hours in seasonally adjusted terms, a monthly fall of 0.6%.
Conclusion
We agree with Westpac that the RBA is unlikely to raise rates:
Market services inflation is above target but a softer than expected labour market and wage outcomes reduce the likelihood of a November rate hike. We believe the RBA is likely to remain on hold for the remainder of this year.
However, credit is growing at an annual rate of 8.5% and broad money supply at 8.0%. Real GDP growth of 2.5% for the 12 months to March 2026 suggests that underlying inflation is between 5.5% and 6.0% (the spread between the two measures and growth in output/GDP).
Our calculation of underlying inflation is more than 1.0% higher than the RBA’s current cash rate target of 4.35%.
We will likely be stuck with high inflation for a while.
Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. ~ Milton Friedman
Acknowledgments
- ABS: Monthly CPI
- ABS: Labor Report
- ABS: Australian National Accounts
- RBA: Growth in Selected Financial Aggregates – D1
Notes
- Credit and money supply represent two sides of the same coin: bank lending and bank deposits. They only tend to diverge when the RBA injects liquidity to rescue the economy from a deflationary spiral, as in 2008, 2010-2013, and 2020.
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.
