July inflation well above forecast: Why?

The monthly CPI inflation indicator shows prices by the end of July were 2.8% higher than the same time last year.

Trimmed mean inflation which excludes volatile priced goods hit 2.7%, up from 2.1% in June.

All of the big four banks' economics teams were predicting that neither headline nor trimmed mean inflation would be above 2.3%.

After several months of inflation easing, some analysts may attribute this unexpected jump to the cash rate cuts that came in February and May.

With three more RBA meetings to come this year, this might point away from further loosening of monetary policy, but it's also important to remember the monthly inflation numbers aren't as comprehensive as the quarterly results.

The Q3 inflation figures are scheduled for release on 29 October, just in time for the Melbourne Cup day RBA meeting.

What's getting more expensive?

Electricity prices were one of the major contributors, rising 13% through the month.

This is partly down to households having used up various state and federal government energy bill rebates, while electricity prices are also annually reviewed in July, so the monthly jump reflects these price increases.

A fresh batch of rebates started in July though that gave little time for the effects to trickle through to the monthly result.

Gas prices also rose 6.2% in July as a result of those energy price reviews.

In more positive news for consumers though, food and non-alcoholic beverage prices rose just 0.15% through the month, the lowest grocery price inflation since March.

Sound the alarm?

Many feel, based on recent rhetoric, that the RBA is increasingly confident in the inflation outlook.

The minutes for the August decision revealed the nine members on the monetary policy board agree it "appears likely" further reduction of the cash would be necessary to preserve full employment while bringing inflation back to target.

July's inflation, combined with the slight drop in unemployment, might be interpreted as pointing towards a return to the more cautious attitude earlier in the year.

All of the big four bank economics teams are officially predicting one more rate cut this year on Melbourne Cup day.

It remains to be seen whether this latest price data, considerably higher than all their forecasts, will change this.

However that gap could be partly attributable to the huge 13% jump in electricity prices, which Senior Westpac Economist Justin Smirk acknowledged was difficult to model.

"We have pencilled in a 6% increase, however there is considerable uncertainty around this estimate," he said.

"Our analysis suggests the national average increase in Default Market Offers (DMO) [which is] the base price for households without a retailer contract - was around 6% in July, implying meaningful upside risk to our electricity forecast."

Electricity is one of the spending categories excluded in trimmed mean inflation because prices are so volatile, so this doesn't explain the increase in trimmed mean inflation which was also above forecast.

However, the monthly CPI does not include all spending categories - Mr Smirk says the July numbers mostly capture the price of durable goods while service prices are the focus of the second and third months of the quarter.