Week in review

• Australia 2Q CPI inflation 3.8% y/y
• No change to Fed policy
• U.S. real GDP expands by 6.5% in 2Q

Week ahead

• RBA official cash rate and Statement on Monetary Policy
• U.S. employment report
• Australia building approvals and housing finance

Thought of the week

As expected the rate of inflation in Australia surged in the second quarter. Compared to a year ago prices were 3.8% higher, and 1.7% higher excluding energy and food items. The narrative hasn’t changed though, and the headline rate of inflation is expected to decline over the rest of this year. The rise in inflation was due to a big jump in a small number of goods and 57% of the sub-groups in the inflation basket are still showing price rises that are less than 2%. Comparison of price moves have been distorted by government policies to support households during the pandemic. The ending of housing and airfare subsidies should create upward pressure on prices, but will most likely be offset by the still ample supply in the labour market and muted wage growth. Moreover, the core rate of inflation that the RBA focuses on is likely to remain below the 2% target in the coming months, weighed down by depressed levels of economic activity resulting from virus restrictions.

Australia’s inflation has narrow focus

Share of CPI basket sub-groups with less than 2% y/y price change

Source: ABS, J.P. Morgan Asset Management. Data reflect most recently available as of 30/07/21.
All returns in local currency unless otherwise stated.
Equity price levels and returns: Levels are prices and returns represent total returns for stated period.
Bond yields and returns: Yields are yield to maturity for government bonds and yield to worst for corporate bonds. All returns represent total returns. AusBond Comp is the AusBond Composite 0+ Yr, AusBond IG is the AusBond Credit 0+ Yr both provided by Bloomberg.
Currencies: All cross rates are against the Australian dollar. An appreciation of the foreign currency against the Australian dollar would be positive and a depreciation of the foreign currency against the Australian dollar would be negative.

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