👉 Background: The Australian Bureau of Statistics (ABS) tracks inflation monthly and quarterly to see how much our everyday costs are rising. That means they compare the price of goods from the same month or quarter last year, to see if prices have gone up, down or have been flat.

‍ 👉 What happened: Now, ABS has announced that annual inflation hit 3% in August, up from 2.8% in July, and the biggest contributors were:

• Housing costs which were up 4.5%
• Food and drinks up 3%
• Alcohol and tobacco up 6%
• Electricity prices which had the biggest spike, jumping nearly 25% in the year to August (mostly because the government rebates ran out)

‍ 👉 What else: With annual inflation at 3% for August, it’s now getting VERY close to the top of the RBA’s 2-3% target inflation band. This means economists reckon no rate cut in September, and less than a one-in-two chance of a rate cut in November too. Because the worst thing the RBA could do would be to cut rates... and then raise them shortly after.

‍What's the key learning?

‍💡Cutting interest rates is like easing the brakes on a speeding car: if you do it too early, momentum can build again and you risk another inflation blowout.

💡Central banks around the world, including the RBA, learned this the hard way in the 1970s. In 1975, inflation in Australia peaked at 18%, then fell back down to “just” 8% in 1979 after a spike in the cash rate. But then it spiked again in the early 1980’s because cash rates were cut prematurely. This damages both the economy and credibility of the central bank.

💡It’s not the only time the RBA has lost credibility. In Feb 2021, the RBA’s former governor said there would be no rate rises until 2024 “at the earliest”… and then raised rates 14 months later, impacting the credibility of the RBA at that point. So the RBA doesn't want to make the same mistakes again.