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Rate cut remains a live option after Aussie inflation data

The Australian inflation data was very close to expectations and remains weak enough to justify another cut in interest rates at the next RBA meeting.

As expected, the headline CPI increased 0.4% over the second quarter. For the past year it is up only 1%

Of the underlying measures used by the RBA, one, the trimmed mean rose slightly more than expected. It was up 0.5% for the quarter and 1.7% for the year. The other, weighted mean measure was exactly in line with consensus forecast; being up 0.4% for the quarter and 1.3% over the year.

Looking at the components of the data, tradable inflation which is about imported goods turned around, helped by an increase in auto fuel which rose 5.9% after 3 consecutive quarterly falls.

As ever, the government sector played its part in increased costs of living. Medical and hospital services were up 4.2% and tobacco rose 2.1%.

After release of the data, the market is pricing about a 50% probability of a rate cut in August. The situation beyond that is more clouded and likely to depend on future data and what the Fed does. The market is currently pricing a 32% chance that rates will be cut twice to 1.25% by December.

The Aussie Dollar had an initial bounce following the higher than expected trimmed mean data but has now retreated to around .7525.

The Australia 200 index has done the opposite and softened slightly in a minor buy the rumour; sell the fact reaction to the data

From here much will depend on what the Fed has to say early tomorrow morning

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