Investors are closely watching the upcoming US inflation figures to assess the effectiveness of the Federal Reserve’s monetary policy in containing inflation before the board meeting next month. The Reserve Bank of Australia is also monitoring the data, as the US inflation trends tend to precede those in Australia. Chief economist for Australia at RBC Capital Markets, Su-Lin Ong, highlighted similarities between the two countries in terms of sticky services inflation and strong labor markets. Australia, however, faces unique challenges such as minimum wage increases, rents, and utilities frameworks.
The US central bank has already raised its funds rate by 5 percentage points since the previous year. Bond futures indicate a 13% chance of a US rate increase in September, which rises to 36% by November. A rate cut is not expected until next year.
The consensus among economists is that the US consumer price index will rise by 0.2% in July, bringing the annual rate to 3.3%. Core inflation, excluding food and energy costs, is also projected to rise by 0.2% from June. However, this would mark the smallest acceleration in 2.5 years.
National Australia Bank agrees with the consensus, but highlights that the biggest risk to the market is for the inflation reading to exceed economist forecasts. A slight increase above 0.2% could potentially bring the possibility of a rate hike in September or November back into consideration. Both NAB and RBC agree with the pricing in financial markets that indicates the Federal Reserve’s interest rate hikes have come to an end.
The inflation outlook is clouded by the recent surge in crude oil prices, which reached their highest levels this year. The market is concerned that this could lead to a pickup in inflation later in the year. Most financial markets and economists believe that the US economy will avoid a recession as price pressures subside. However, some believe that inflation will be more resilient and that the markets are overly optimistic.
The outcome of the US inflation figures could trigger significant market movements. A higher-than-expected figure could lead to a stronger US dollar and put pressure on the Australian dollar. Conversely, a lower-than-expected figure could spark a bond rally and lift the Australian dollar.