During Wednesday’s Asian trading session, the Australian dollar surged against the US dollar, trading near 0.7180, as stronger-than-expected inflation data dramatically shifted market expectations for the Reserve Bank of Australia's policy trajectory. The currency climbed roughly 0.3% to hit a six-month high of 0.7184.

Australia's July CPI figures released on Wednesday comprehensively beat forecasts, with the monthly CPI rising 1.0%, well above the 0.8% anticipated. On an annual basis, inflation eased from 3.8% to 3.5%, yet this still exceeded the market consensus range of 3.2%-3.3%. The more closely watched core inflation gauge, the trimmed mean CPI, rose 0.5% month-on-month, significantly outpacing the 0.3% expectation, while its annual rate held steady at 3.6%, above the 3.5% consensus. The data details reveal broad-based inflationary pressures, with market goods and services excluding volatile items up 1% month-on-month and discretionary spending excluding tobacco rising 1.5%. The Aussie dollar jumped following the release, prompting markets to swiftly reprice the likelihood of another RBA rate hike in September.

Headline inflation beats forecasts across the board, with trimmed mean jumping 0.5% monthly

Australia's July CPI increased 1.0% month-on-month, far exceeding the 0.8% forecast and reversing the prior month's 0.1% decline. The annual rate slipped from 3.8% to 3.5%, though it remained above the 3.2%-3.3% consensus range and the 3.3% median prediction. The improvement in the annual figure partly reflects the fading of an unusually high base effect from July last year, rather than a genuine slowdown in current price momentum. The RBA's preferred trimmed mean CPI climbed 0.5% month-on-month, well above the 0.3% expectation, with the annual rate steady at 3.6%, higher than the 3.5% consensus. The weighted median CPI edged down from 3.7% to 3.6% annually, but rose from 0.3% to 0.4% on a monthly basis.

Inflationary pressure is widespread, not merely a temporary petrol price spike

The data details suggest inflation has a broad foundation. Market goods and services excluding volatile items rose 1% month-on-month, while discretionary spending excluding tobacco increased 1.5%. This breadth is more concerning to the RBA than petrol-driven components, as it points to underlying demand pressures across a wider range of goods and services, rather than a single cost-driven distortion. The comprehensive upside surprise marks a notable shift in the prevailing market narrative of easing inflation, particularly given major banks had widely expected the trimmed mean to moderate to around 3.5%. RBA staff had previously flagged upside risks to inflation forecasts, and today's data may indicate that risk is materialising.

RBA September rate hike expectations repriced higher

The Australian dollar jumped after the data release, with markets quickly repricing the probability of another RBA rate increase in September. Previously, money markets had priced in roughly a 50% chance of a December hike, but today's figures have pushed the September meeting directly into "live" territory. The RBA has already raised rates three times this year in an effort to bring core inflation back to its 2%-3% target range. Today's data provides strong evidence that the tightening cycle is not yet over. While more data is due before the September meeting, today's release has substantially altered the policy debate, shifting the focus from "whether to hold" to "whether to hike again."

Summary

Australia's July CPI rose 1.0% month-on-month, far exceeding expectations, with the annual rate at 3.5%, above consensus. The trimmed mean CPI climbed 0.5% month-on-month, well above forecasts, while its annual rate held at 3.6%. The data details reveal broad inflationary pressures, with market goods and services up 1% and discretionary spending rising 1.5%. This comprehensive upside surprise marks a clear shift in the disinflation narrative. The Australian dollar jumped, and markets quickly repriced the possibility of a September rate hike. With the RBA having already raised rates three times, today's data offers compelling evidence that the tightening cycle remains unfinished.