Australian inflation remains subdued, but the pressures are building

While they remain subdued, inflationary pressures in Australia continued to build in July.

The TD-MI inflation gauge rose by 0.2% following a 0.1% gain in June, leaving the annual increase at 1.6%. Of the 87 goods and services surveyed, 39 increased while 22 fell. Another 26 recorded no change from June.

While still well below the 2-3% inflation band targeted by the RBA, it was the third consecutive month that the annual rate had accelerated.

Contributing to the overall change in July were price rises for property rates and charges (+3.3%), other food products (+5.5%) and non-alcoholic beverages (+2.8%). These were offset by price falls in water and sewerage (-3.6%), alcohol and tobacco (-1.6%), and automotive fuel (-2.3%), according to Annette Beacher, chief Asia-Pac macro strategist at TD Securities.

Despite running below the RBA’s inflation target, given the acceleration in the annual rate and recent optimistic statements from RBA governor Glenn Stevens, Beacher believes the RBA is likely to leave interest rates unchanged for “quite some time”.

“Our TD-MI Inflation Gauge accurately predicted the turnaround in tradable inflation in the June quarter and this July reading suggests further upward momentum is in train. The fall in utility prices in July was the result of a state government rebate, and is a one-off. Otherwise, inflation remains well contained, although annual rates may have found a trough”, said Beacher.

“Cautious optimism from the RBA Governor in recent weeks speaks to us that the RBA Board is likely to leave the cash rate at 2% for quite some time”, she added.

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