The latest monthly inflation data in Australia showed the consumer price index (CPI) gained 6.8% from July to August, down from 7% the previous month.
The Reserve Bank of Australia's decision on Tuesday to lift the cash rate by 25 basis points instead of the expected 50 has been a key benefactor to ASX shares this week.
Markets have responded well, with the benchmark S&P/ASX 200 Index (ASX: XJO) climbing nearly 5% since the interest rate announcement two days ago.
But the question that's likely on everyone's minds is when to expect pricing pressure to ease.
While it's a contentious topic, many experts have weighed in with their opinions.
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Inflation to peak soon?
Unfortunately, forecasting inflation has proven to be something of an inexact science over the past two years.
Even RBA governor Phillip Lowe acknowledged the central bank's failings in accurately predicting the enormous spike in inflation in a recent speech.
Federal treasurer Jim Chalmers told a media conference at Parliament House on Tuesday the RBA is very clear "they think there is more work to be done by tightening the interest rate".
Chalmers said:
Clearly, we've still got an inflation problem in this economy…[plus] the effect of rising interest rates is often not immediate. Clearly, the [RBA] needs to take that into consideration.
Our own Treasury forecasts expect inflation will get worse before it gets better, but it will get better and it will moderate during the course of next year.
This aligns with Lowe's remarks in the latest RBA policy statement that said the central bank will "increase interest rates further over the months ahead".
In a note to clients, ANZ chief economist David Plank also believes the RBA will need to lift rates further to see a reversal in inflation.
This would mean a "move into clearly restrictive territory of more than 3% to ensure inflation does return to target [of 2-3%]", Plank said.
Meanwhile, SPI Asset Management says the RBA's decision to lift the cash rate by 25 basis points and not 50 was based on market volatility rather than a sign of inflation cooling.
The wealth management company said in a note:
While inflation has yet to peak in Australia, the RBA's more cautious hiking pace indicates that it is prepared to wait for the effects of monetary policy tightening already enacted to emerge more fully.
Given the fact the RBA was slow to act on inflation in the first place, this could weigh in as well.
As seen in the chart below, when inflation numbers began to spike past multi-year highs in 2021, the RBA didn't act on interest rates until May 2022. The graph shows inflation prints [yellow and blue lines] versus the cash rate in the bottom pane.
In contrast, Betashares economists noted the RBA might be more focused on keeping the economy from entering into recession.
"[M]ore of our currently high rate of inflation appears to reflect global factors, rather than local demand imbalances," they said, cited by The Australian.
Betashares experts agree the RBA is likely to continue its hiking cycle until mid-2023.
Whether this will coincide with the peak of inflation, we will have to wait and see.
