Yesterday’s inflation result is enough for the Reserve Bank to continue its pause, but anyone hoping for that to happen wasn’t helped by the US central bank’s decision overnight to raise the official interest rate again.

The quarter percent hike there takes the equivalent to our cash rate of interest to a 22-year high of 5.25-5.5%. They have a band for their “Fed funds rate”, where we have a set rate, which is now at 4.1%. The magnitude of the difference between the USA’s rate and our base rates (that then influences lending and deposit rates of interest) puts pressure on the RBA to raise again.

Why? One reason is that higher rates in the US can push the greenback up and our dollar down, which would be inflationary for us.

I also think there’s a global fear about inflation remaining sticky, so central banks want to make sure they crush inflation to 2% in the case of the Federal Reserve in the States and 2-3% here in Oz.

However, they are risking throwing their economies into recession because official interest rate rises don’t work immediately. And right now, the hikes of the US and Australian central banks could end up over-tightening, which could make people like me use the R-word. (When I first started writing for newspapers, it was frowned upon if you started talking about a recession unless there was clear evidence. That’s why many scribes used the “R-word” instead of coming out with the word recession. Strange when you think about it in the modern context, but I guess their editors and maybe the papers’ owners didn’t want to panic business and consumers and annoy the government of the day!)

So, was yesterday’s Consumer Price Index good enough to cause the RBA to pause again next Tuesday?

The answer is yes but somehow I doubt they will. Anyway, let’s look at the CPI data first, so here goes:

1. The annual CPI rise fell from 7% to 6%, which was more than expected.
2. The June quarter rise was 0.8%, which was less than expected.
3. This was the smallest quarterly rise since September 2021.
4. Underlying inflation (the trimmed mean) fell by 0.9%, which was better than expected too.
5. If you annualised this 0.9%, you get 3.6%, which should be noted by the RBA.
6. If you annualise the headline rate of 0.8% you get 3.2%, which is close to the RBA’s 2-3% band.
7. Economist Shane Oliver of AMP looked at the data and said: “We have revised down our forecast for the cash rate peak to 4.35% from 4.6%.”

Shane’s Pipeline Inflation Indicator (blue line) shows how inflation is falling now, while the official CPI (the red line) is behind but is starting to catch up.

The blue line’s big fall and the annualised inflation rate (found by multiplying the current quarterly number of 0.8% by four, which gives a low 3.2% reading) both suggest the RBA could easily pause on rates next week.

By the way, the quarterly rise of only 0.8% tells us more about the price rises we’ve been seeing over the past three months, so is more relevant than the annual number of 6%, which adds up the inflation we saw in the September and December quarters of last year and even the March quarter of this year.

If inflation is going to be sticky, it’s not showing right now.

Interestingly, the AFR reports today that “Heading into the crucial data release, the bond market implied a greater than 50 per cent chance that the Reserve Bank would lift the cash rate to 4.35 per cent when it meets next Tuesday. But that was slashed to about a 33 per cent chance on the basis that the deceleration in prices was a good enough reason to pause.”

The RBA should pause next week but just like the US central bank overnight, they could think that we need one more rise for the road. Central bankers don’t think like normal human beings and that’s why they’re central bankers!