Services inflation to worry RBA

Briefly in today's #5in5withANZ podcast below:

Australian inflation drops within the RBA’s target band for the first time since October 2021, but sticky services prices could be a concern. The Aussie and Kiwi dollars are down about 1% after hitting fresh 2024 highs yesterday. Services inflation also remains sticky in Japan.

5 things to know in 5 minutes:

1. the US dollar strengthened in late trading overnight, pushing the Aussie dollar down 0.9% at 4am Sydney/Melbourne time. The Aussie had earlier hit a 2024 high above 69 US cents. ANZ Institutional Head of FX Research Mahjabeen Zaman, GAICD says a number of factors are in play for the Aussie to hold near current levels.
2. The Kiwi dollar was also down about 1% after hitting a new 2024 high yesterday. Mahjabeen says while New Zealand economic data has been mixed, Q2 GDP wasn’t as weak as expected and stronger dairy prices have supported the currency recently.
3. Annual inflation in Australia fell 0.8 percentage points to 2.7% in August, according to the partial indicator - the first time inflation has been within the RBA’s 2-3% target band since October 2021. ANZ Senior Economist Catherine Birch says the drop was driven by federal and state government energy rebates.
4. Catherine says even that fall in the underlying, trimmed mean measure might not be enough to shift a hawkish RBA due to sticky services inflation and a need to see quarterly data in October.
5. The US dollar also rose one percent against the Yen overnight. In Japan yesterday, producer prices in the services industry rose 2.7% from a year ago in August - slightly above expectations but below the 2.8% in July. Mahjabeen says this indicates sticky services inflation remains, which could support a Bank of Japan hike in October.

In part two of a bonus 5-minute Deep Dive interview:

ANZ Chief Economist for Greater China Raymond Yeung 楊宇霆 analyses the risks in China's decision to do a relatively small stimulus, including the prospect of a Japan-style ‘lost decade’.

Cheers

Bernard

PS: Catch you tomorrow with a look ahead to US PCE inflation data, which will give the first real clue on how big the Fed’s next rate cut might be.