Big banks tip 4% inflation after RBA damage control

NAB expects next week's August headline inflation number to come in at 4.1% while Commonwealth Bank is not far behind at 4%.

It will be a significant jump from the 3.5% recorded in July, largely attributed to the sharp rise in fuel prices due to the ongoing conflict in the Middle East.

Both big banks expect annual trimmed mean inflation - which doesn't include fuel cost blow-outs - to remain unchanged at 3.6%, still uncomfortably above the Reserve Bank's target band of 2-3%.

All four big banks are in line with market expectations of an increase to the cash rate to 4.6% when the Reserve Bank's monetary policy board meets next week.

The decision will be taken without August CPI data which will be released the next day.

CommBank said the August numbers will provide an important test of how much signal to take from July's stronger-than-expected inflation outcome.

It will also provide more information on crucial quarterly inflation data due to be released the week before the RBA's November meeting.

What's behind increasing inflation?

Runaway headline inflation in August will largely be due to rising fuel prices, with petrol around 15% higher month-on-month and diesel around 20% higher.

NAB expects both are set for further gains in September.

However, both big banks expect monthly trimmed mean inflation - which excludes volatile items such as fuel - to slow in August although see no change in the 3.6% print recorded in July.

CommBank said if its estimates for August inflation are correct, the most likely outcome for third-quarter inflation would be for the trimmed mean number to come in at 1% for the quarter.

This would mark a notable acceleration from the 0.8% increase in the second quarter, the bank said, and could see the RBA hike the cash rate again in November.

So far, ANZ is the only big bank forecasting cash rate increases in both September and November. 

Market services inflation 'key test'

While fuel prices are expected to bloat the August CPI, CommBank says it will be market services inflation that is a key measure of the persistence of inflationary pressures.

Services inflation strengthened considerably in July, with restaurant meals being the largest contributor as well as recreational, sporting, and cultural services.

CommBank expects the pace of market services inflation to moderate in August but not reverse July's gains.

Some of the rise in July reflected start-of-financial-year step-ups in prices which are unlikely to be repeated in August.

New dwelling prices are also forecast to rise in August although CommBank expects the annual rate to slow slightly from 5.7% to 5.6% as housing market activity slows.

Rents are also expected to rise 0.3% in the month, keeping rent inflation firm.

How can the Reserve Bank raise the cash rate without the latest inflation data?

Initially, the timing of the Reserve Bank's September meeting was a factor in why some economists thought the monetary policy board would defer a cash rate hike until it had full quarterly CPI data the week before its November meeting.

Westpac's chief economist Luci Ellis - a former Reserve Bank assistant governor - clarified the central bank was not privy to data before its official release.

But as inflationary pressures began ramping up, economists brought forward their forecasts of a possible November cash rate hike to a definite hike in September.

The change in timing was largely due to spiking oil prices but also the inflationary effects of robust data centre investment and the reported willingness of companies to pass on their rising costs to consumers.

Reserve Bank governor Michele Bullock has long said the board would not hesitate to lift the cash rate if it felt upside risks to inflation in the economy were accelerating.

Last week, she told a parliamentary committee some of these risks "appear to be materialising".

Financial markets are pricing in around a 90% chance of the cash rate increasing by 25 basis points to 4.6% on Tuesday.

It will take the cash rate to its highest level in almost 16 years.

Most analysts are adopting a wait-and-see approach as to whether there will be a follow-up cash rate hike on Melbourne Cup Day.

Savings.com.au will provide live coverage of the RBA's monetary policy decision on Tuesday 29 September from 1:30 pm (AEST).