By: Editorial Team, StoneX Media
Australia's trimmed mean inflation rose 0.3% in July and left the annual rate unchanged at 3.6%, above the 3.5% pace expected. Trimmed mean inflation is the Reserve Bank of Australia's preferred measure of underlying inflation, stripping out the largest price moves in both directions so that the remaining reading reflects the broad pulse rather than a handful of volatile items. That distinction matters because the headline rate moved the other way, easing to 3.5% from 3.8%, while the underlying reading stood still. For anyone tracking the path of Australian interest rates, the underlying measures carry far more weight than the headline number that leads the coverage.
David Scutt is a Senior Market Analyst for Global Macro at StoneX Media, with more than a decade of experience as a foreign exchange spot, forwards and money markets dealer in bank treasury, where he managed interest rate and liquidity risk. He produces technical and fundamental analysis across foreign exchange, commodities and equity indices, and follows the central bank data and policy commentary that shape rate expectations across the Asia-Pacific region.
"Australia has an inflation problem and the risk of another RBA rate hike has increased", David Scutt says of the July report. The two underlying gauges arrive at that conclusion by different routes. The trimmed mean discards the largest price increases and decreases in the basket and averages what remains, while the weighted median takes the price change sitting at the midpoint of the distribution once items are ranked and weighted. Both landed at 3.6% for the year, and as Scutt puts it, "Both are miles above the RBA's 2.5% inflation midpoint target". Because the two measures are constructed differently and still agree, the Reserve Bank of Australia is left with little room to treat the reading as a quirk of one method.
The annual rate hides the direction of travel, and the shorter windows tell a different story. Trimmed mean inflation is running at a 4.7% annualized pace over the past three months against 3.9% over the past six, while the weighted median sits at 4.3% over three months and 3.5% over six. In both cases the recent pulse is faster than the medium term pace, which is the signature of underlying inflation reaccelerating rather than converging on target. Previous Reserve Bank of Australia research found that headline inflation tends to move toward the underlying measures rather than the underlying measures following the headline down, so a softer headline print carries less information than the trimmed mean it is expected to converge with. The consequence is straightforward, as David Scutt notes, "So while headline inflation has come down, the underlying pulse is moving in the wrong direction".
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--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: David Scutt, StoneX Media Senior Market Analyst
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Australian headline inflation cooled to 3.5% from 3.8% year over year, yet the trimmed mean measure barely moved and stayed above the Reserve Bank of Australia's target band. That gap between the headline number and the core detail is what rebuilt hike expectations, not the top line everyone reads first.
Australia's headline inflation rate fell in July while both of the underlying measures the Reserve Bank of Australia relies on held firm above target. Understanding how the trimmed mean and the weighted median are built explains why the softer headline number did nothing to reduce the risk of another rate hike.
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