The Australian Bureau of Statistics (ABS) is set to release the July Consumer Price Index (CPI) on Wednesday at 01:30 GMT, with expectations that inflation will rise 3.2% year-on-year, down from 3.8% in June. The monthly CPI is forecast at 0.8%, a rebound from the -0.1% recorded in the previous month. The Trimmed Mean CPI, which is the Reserve Bank of Australia’s (RBA) preferred inflation measure, is anticipated to print at 3.5% annually, slightly lower than the prior 3.6%, while the monthly figure is expected to remain unchanged at 0.3% [1].
Ahead of the data release, the Australian Dollar (AUD) is trading just below a multi-month high of 0.7180 against the US Dollar (USD), as the USD weakens amid ongoing geopolitical turmoil. The RBA minutes from August highlight concerns that higher energy prices and strong demand for goods related to AI development are contributing to inflationary pressures globally, particularly due to the war in the Middle East. While core inflation measures have not yet surged significantly, the RBA discussed the potential for these global factors to further impact Australian import and consumer prices [1].
Despite inflation easing unexpectedly in the June quarter, the RBA notes that inflation remains well above target and expects trimmed mean inflation to stay above 3% until mid-2027. The Board recently decided to keep the Official Cash Rate (OCR) unchanged at 4.35% after considering a possible fourth rate hike this year. The upcoming inflation data is seen as pivotal for shaping market expectations regarding future monetary policy decisions [1].
Market participants anticipate that an annual CPI reading of 3.2% would dampen expectations for additional rate hikes, potentially weakening the AUD. However, a figure between 3.2% and the previous 3.8% could raise the likelihood of further hikes, while a reading above 3.8% might trigger market panic, leading to a temporary spike in the AUD before sentiment turns negative. Additionally, oil prices are retreating in the near term amid renewed hopes for US-Iran negotiations, which could influence inflation dynamics further [1].
CONCLUSION
The anticipated easing in Australian inflation is likely to reduce expectations for further RBA rate hikes, which could weigh on the AUD. However, any upside surprise in the CPI data may prompt renewed speculation about tighter monetary policy. The upcoming inflation release remains a key driver for both market sentiment and the RBA’s policy outlook.