While markets and commentators expect the RBA to extend its monetary policy pause based on the better-than-expected headline inflation for the June quarter, Westpac believes that there are other factors to consider. In both the June and July meetings, the RBA's decision to hike or pause was primarily influenced by the monthly headline inflation reports. However, other indicators, such as the labor market and services inflation, were arguably consistent with a different decision. Westpac emphasizes that the quarterly report provides more reliable and detailed information for the RBA to make its policy decision.

Reassessing the Inflation Picture

In the June quarter, headline inflation was 6.0%, lower than the RBA's forecast of 6.3%. However, core inflation (trimmed mean) remained at 5.9%, close to the RBA's projection. Goods inflation decreased from 7.6% to 5.8%, while services inflation increased slightly from 6.1% to 6.3%. When considering the stickiness of services inflation, Westpac believes that inflation will moderate in the second half of 2023 as goods inflation unwinds at a faster pace.

Other Factors to Consider

Westpac highlights several other factors that may impact inflation in the coming months. First, the strength of the labor markets and the persistence of low unemployment rates contribute to increased incomes and demand, putting pressure on wage growth. Second, slow productivity growth, which has been a consistent concern for the RBA, can lead to faster growth in unit labor costs. Third, the resurgent housing market and its effects on activity, inflation, and wealth can make it challenging for the RBA to achieve its inflation target. Finally, emerging risks around commodities, such as rising oil prices and impacts on global food prices, can also contribute to higher inflation.

Conclusion

While markets expect the RBA to maintain its pause based on the June quarter's inflation report, Westpac argues for an additional 25bp rate hike at the August meeting. Taking into account the stickiness of services inflation and the concerns around the labor market and productivity, Westpac believes that a combination of one last hike in August, accompanied by an ongoing tightening bias, is the best approach to address the inflation challenge.