The Melbourne Institute’s monthly inflation measure increased by 0.9% in July, up from just 0.1% in June. This is the biggest monthly rise we’ve seen in 19 months, pushing annual inflation up to 2.9% from 2.4% in June. Trimmed mean inflation also rose by 0.8% month-over-month in July, marking the largest increase in 19 months as well, with an annual rate of 2.6%. These results go against the Reserve Bank of Australia’s (RBA) expectations for a rate cut.

Inflation Data Insights

While the Melbourne Institute’s data isn’t as widely regarded as other inflation measures, it indicates renewed price pressure in the economy. The latest inflation report from the Melbourne Institute is surprising, showing a 0.9% jump in July. This change reverses the cooling trend from June and raises the annual rate to 2.9%. This unexpected rise will make traders rethink their recent predictions about a possible RBA rate cut. It’s important to note that this is a private survey, unlike the official Consumer Price Index (CPI) that the RBA values more. The last official CPI release for the second quarter of 2025 showed inflation easing slightly to 3.4% annually, which led to hopes for a rate cut. This new report challenges that idea, but we need official data to confirm the trend before concluding.

Labour Market and Economic Outlook

In the broader view, the labour market stays strong, with the unemployment rate at 3.9% as of July. This economic strength, along with the potential rise in prices, suggests that the RBA will likely keep interest rates steady. A rate cut now seems much less likely than it did a week ago. Reflecting on the RBA’s actions in 2024, they have been very cautious about cutting rates too soon and risking a new wave of inflation. They may ignore this one private survey and wait for the official third-quarter CPI report in late October before making any major decisions. For now, they will likely maintain a “higher for longer” stance. For those involved in interest rate trading, this situation means reversing bets on rate cuts for late 2025 or early 2026. We can expect short-term bond yields to rise as the market adjusts the chances of a cut this year to nearly zero. Futures contracts linked to the RBA’s cash rate will likely see a hawkish shift in the coming days. Increased uncertainty is a significant takeaway, which makes options strategies more appealing. We expect higher implied volatility in the Australian dollar and bond markets. Traders might consider buying straddles or strangles to profit from larger-than-expected moves, as the debate between a strong economy and persistent inflation heats up. This new data should also boost the Australian dollar. With other central banks leaning towards easing, a more hawkish RBA makes the Aussie more attractive. We might see the AUD/USD find support and rise, so traders could think about taking long positions in the currency or purchasing call options. Create your live VT Markets account and start trading now.

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