Monthly CPI data show headline inflation rose from 1.9 percent in June to 2.8 percent in July, above the consensus forecast of 2.3 percent, with annual electricity price increases the main factor pushing up headline inflation. Headline inflation has now been within the Reserve Bank of Australia's target range of two percent to three percent for twelve consecutive months but is now at its highest level for this period. This monthly indicator measures the year-over-year change in the CPI index compared with the same month twelve months earlier.

The increase in headline inflation in July was largely driven by electricity prices, up 13.1 percent on the year after a previous decline of 6.5 percent. This increase reflects both the impact of annual price reviews and the delayed payments of government rebates in parts of the country. Automotive fuel prices fell 5.5 percent on the year after a previous decline of 8.0 percent while food prices rose 3.0 percent on the year after a previous increase of 3.2 percent. Underlying measures of inflation also rose, with the trimmed mean measure increasing from from 2.1 percent to 2.7 percent, and the measure excluding volatile items and holiday travel picking up from 2.5 percent to 3.2 percent.

At their most recent policy meeting earlier in the month, the RBA lowered policy rates by 25 basis points, with officials advising that they expect headline inflation to pick up slightly later this year but then fall back to around the mid-point of their target range of two to three percent. The minutes of the meeting published earlier this week also showed that officials expect to lower rates further but are not sure about the likely pace of policy easing. Today's increase in underlying inflation will likely strengthen the case for a more gradual pace or rate cuts.

CPI is expected to show a much bigger 2.3 percent rise on year in July versus 1.9 percent in June. June was skewed down by a big 0.4 percent drop in electricity prices and that factor is seen reversing in July.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by households for a fixed basket of goods and services. In Australia, the CPI measures the changes in the price of a fixed basket of goods and services, acquired by household consumers who are residents in the eight State/Territory capital cities. (Darwin, Perth, Sydney, Melbourne, Hobart, Brisbane, Canberra and Adelaide).

Data are released quarterly and, since 2022, monthly. Quarterly inflation data measure the year-over-year change in the index relative to the same quarter twelve months previously. Monthly inflation data measure the year-over-year change in the index relative to the same month twelve months previously.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as Australia, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments. Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Reserve Bank of Australia generally follows the annual change in the consumer price index. It has an inflation target of 2 percent to 3 percent. The RBA also has two preferred core or analytical measures - the weighted and trimmed means. The trimmed mean is a method of averaging that removes a small percentage of the largest and smallest values before calculating the mean. After removing the specified observations, the trimmed mean is found using an arithmetic averaging formula. The weighted mean excludes certain items from the CPI basket (the exclusion approach). Typically, the excluded items are those that are volatile and/or display pronounced seasonal patterns, and those that are subject to administrative price setting.