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There will always be items in the CPI basket with price inflation a long way from the RBA’s 2–3% target. That is no reason to dismiss measures of underlying inflation, such as the trimmed mean, as an indicator of current inflation pressures.

The RBA’s mandate involves an inflation target of 2–3%, always aiming for the 2½% midpoint, while recognising that there will be times when flexibility is needed. The overall CPI inflation result can be pushed around by one-off movements in particular components that say nothing about future trends. That is why the RBA also focuses on various measures of ‘underlying’ or trend inflation. They particularly focus on the trimmed mean measure, which is calculated by excluding the largest increases and decreases that quarter, then taking the average over what remains. Trimmed mean inflation is not the target, but it is the best available single indicator of current momentum in inflation. It is also the measure the RBA uses in most of its forecasting models.

Within both total and trimmed mean inflation, particular subcategories can have inflation rates that are very different from the 2–3% target. Some of these are the results of transitory supply shocks, like the 17% increase in lamb and goat meat prices over 2024, or policy changes, like the 12% increase in tobacco prices over the same period. These shifts typically get excluded from the trimmed mean calculation. As such, there is no real need to remove selected items and then perform the trimmed mean calculation.

(Be sceptical, too, when people advocate removing one policy-affected item, such as electricity, but not another policy-affected item moving in the opposite direction, such as tobacco. In any case, Westpac Senior Economist Justin Smirk has previously calculated that removing electricity before calculating the trimmed mean makes very little difference to the result.)

There are, however, plenty of categories where the trend rate of inflation is materially different from the overall inflation rate. For example, insurance prices have risen at an annual rate of more than 5% over the past 20 years. On the other side, prices of garments, adults’ shoes and household appliances have fallen overall over the same period. Not all these categories will be trimmed out in a particular quarter. It depends on how extreme those trend price changes are relative to the overall distribution of inflation by component.

The important point here is that the RBA’s mandate is not to get prices of every single category in the CPI basket increasing at 2–3%. As long as the average is in the range – and, per the latest Statement on the Conduct of Monetary Policy, heading towards its midpoint – then the mandate is being fulfilled. There will always be items with price inflation a long way from that range. Changes in relative prices are a natural and desirable part of a well-functioning market economy. They are central to the way buyers and sellers – in this case, consumers and producers – respond to real-world changes.

This is why one should be wary of arguments that the RBA should set monetary policy in a specific way because some subset of the inflation basket is showing price growth above the 2–3% target range, even though overall inflation is at or near target. It depends on the context.

For example, for much of the inflation-targeting period since the mid-1990s, services inflation has run faster than goods inflation. Is that difference a reason to run tight policy? Not necessarily. It depends on whether the low-inflation category is likely to stay that way.

That question became particularly salient in the post-pandemic period. Goods inflation increased considerably as supply chains were disrupted. If goods inflation normalised (to below-target rates) as supply chains normalised, then services inflation could also normalise to its above-target average rate, and overall inflation could settle within the target as intended.

The wrinkle would be if goods prices reverted some way back to their pre-pandemic norms. That would mean goods inflation would spend some time below normal, possibly involving some outright price declines, before presumably reverting to average. If overall inflation had returned to target on the back of a temporary period of below-normal goods inflation, then clearly above-trend services inflation would not be compatible with keeping inflation sustainably in the target range once goods inflation normalised.

This has been part of the concern in the US. Like Australia, services inflation typically runs faster than goods inflation there. Rolling 10-year average inflation rates have generally been 1ppt or so higher for US services than US goods, similar to the post-2000 picture in Australia. But unlike the situation in Australia, goods inflation fell noticeably below its pre-pandemic average recently, flattering the overall rate of inflation. Given recent tariff announcements, it seems unlikely that goods prices will continue falling for an extended period. Indeed, a period of US goods inflation above historical averages is probably on the cards. Falling housing-related inflation may help offset this, but one can’t help thinking that the sustainability of US inflation near target is more fragile than is the case for Australia.

Some may object that current rates of inflation for services in Australia are still well above pre-pandemic rates. Recall, though, that overall inflation undershot the RBA’s target for several years pre-pandemic, partly because services inflation was running at a persistently below-average pace. So that is not the best benchmark period for comparison. Current services inflation is also a bit above the average of the first decade of the 21st century, but not drastically so. And the ongoing unwind in rents and insurance inflation, as pandemic effects continue to wash out, should help narrow the gap.

Perhaps we should be more concerned that, despite weak household demand, goods inflation didn’t see the same period of decline as in the US. Part of this might be the pause in the long-running trend decline in prices of audiovisual and computing equipment in Australia. We also observe, though, that homebuilding costs are included in the CPI in Australia but not in the US, and that the pandemic surge in these costs is unwinding.

Whatever the main driver of the difference, the main point here is that goods inflation is not temporarily flattering the total inflation result in Australia. And since electricity prices are currently excluded from the trimmed mean inflation rate, they are not flattering underlying inflation either. Economy-watchers, including the RBA, can therefore be confident that the 3.2% result for trimmed mean inflation over 2024 (and an annualised rate of 2.7% over the second half of the year) is indeed giving a sufficiently accurate picture of current inflation pressures in Australia, and act accordingly.

Daily Pivots: (S1) 191.11; (P) 192.09; (R1) 192.99; More...

GBP/JPY retreated after rising to 193.04 and intraday bias is turned neutral first. Overall, corrective pattern from 180.00 is extending, possibly with rebound from 187.04 as another upleg. Above 193.04 will target 194.73 resistance first. Firm break there will solidify this case and target 198.94 next.

In the bigger picture, price actions from 208.09 are seen as a correction to rally from 123.94 (2020 low). Strong support should be seen from 38.2% retracement of 123.94 to 208.09 at 175.94 to contain downside. However, sustained break of 152.11 will bring deeper fall to 100% projection of 208.09 to 180.00 from 199.79 at 171.70, even still as a correction.

Daily Pivots: (S1) 158.88; (P) 160.04; (R1) 161.07; More...

EUR/JPY retreated after rising to 161.17 and intraday bias is turned neutral first. Overall, sideway pattern from 154.40 is still extending with another upleg. On the upside, above 161.17 will target 164.07 resistance and then 164.89.

In the bigger picture, price actions from 175.41 are seen as correction to rally from 114.42 (2020 low). Strong support should be seen from 38.2% retracement of 114.42 to 175.41 at 152.11 to contain downside. However, sustained break of 152.11 will bring deeper fall to 100% projection of 175.41 to 154.40 from 166.57 at 145.56, even still as a correction.

Daily Pivots: (S1) 0.8306; (P) 0.8336; (R1) 0.8358; More...

Intraday bias in EUR/GBP remains neutral and near term outlook stays mixed. On the upside, above 0.8376 minor resistance will bring stronger rally towards 0.8472. However, on the downside, break of 0.8290 will resume the fall from 08472 to retest 0.8221 low.

In the bigger picture, rebound from 0.8221 medium term bottom could extend higher through 55 W EMA (now at 0.8435). However, medium term outlook will be neutral at best as long as 0.8624 cluster resistance zone (38.2% retracement of 0.9267 to 0.8221 at 0.8621) holds. Another decline through 0.8221 would remain mildly in favor.

Daily Pivots: (S1) 1.6511; (P) 1.6573; (R1) 1.6625; More...

Intraday bias in EUR/AUD remains mildly on the upside for the moment. Corrective pattern from 16800 could have completed with three waves to 1.6391 already Further rally would be seen to retest 1.6800 first. Decisive break there will resume whole rally from 1.5963 to 61.8% projection of 1.5693 to 1.6800 from 1.6391 at 1.6908. For now, risk will stay on the upside as long as 1.6391 support holds, in case of retreat.

In the bigger picture, with 1.5996 key support (2024 low) intact, larger up trend from 1.4281 (2022 low) is still in favor to resume through 1.7180 at a later stage. Nevertheless, sustained break of 1.5996 will indicate that such up trend has completed and deeper decline would be seen.

Daily Pivots: (S1) 0.9397; (P) 0.9455; (R1) 0.9510; More....

EURCHF reversed ahead of 0.9516 resistance but recovered well ahead of 0.9359 support. Intraday bias remains neutral first. On the downside, break of 0.9359 will argue that recent rebound from 0.9204 has already completed and bring deeper fall. However, sustained break of 0.9516 will carry larger bullish implication and extend the rise from 0.9204.

In the bigger picture, sustain above 38.2% retracement of 0.9928 to 0.9204 at 0.9481 should confirm that whole fall from 0.9928 has completed at 0.9204. Further rally should then be seen back to 61.8% retracement at 0.9651 and above. However, another rejection by 0.9481 will keep outlook bearish for extending larger down trend through 0.9204.

Daily Pivots: (S1) 1.0404; (P) 1.0435; (R1) 1.0498; More...

EUR/USD is extending the corrective pattern from 1.0176 with another upleg and intraday bias stays neutral. Outlook will remain bearish as long as 38.2% retracement of 1.1213 to 1.0176 at 1.0572 holds. On the downside, break of 1.0176 will resume whole fall from 1.1213. However, decisive break of 1.0572 will raise the chance of reversal, and target 61.8% retracement at 1.0817.

In the bigger picture, immediate focus is on 61.8 retracement of 0.9534 (2022 low) to 1.1274 (2024 high) at 1.0199. Sustained break there will solidify the case of medium term bearish trend reversal, and pave the way back to 0.9534. However, reversal from 1.0199 will argue that price actions from 1.1274 are merely a corrective pattern, and has already completed.

Daily Pivots: (S1) 152.12; (P) 153.40; (R1) 154.08; More...

Intraday bias in USD/JPY remains neutral for the moment. Outlook is unchanged that corrective fall from 158.86 should have completed at 150.92 already. Risk will stay on the upside as long as 150.92 support holds. Above 154.79 will target a retest on 158.86 first. Firm break there will resume whole rally from 139.57 to retest 161.94 high.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). In case of another fall, strong support should be seen from 38.2% retracement of 102.58 to 161.94 at 139.26 to bring rebound. However, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 1.2387; (P) 1.2435; (R1) 1.2493; More...

GBP/USD's corrective rebound from 1.2099 extended slightly higher, but stays below 38.2% retracement of 1.3433 to 1.2099 at 1.2609. Intraday bias remains neutral first, and larger fall from 1.3433 is still expected to continue. Break of 1.2331 minor support will turn bias to the downside for 1.2248 support. Firm break there will argue that the correction has completed and bring retest of 1.2099 low. However, decisive break of 1.2609 will raise the chance of near term reversal, and target 61.8% retracement at 1.2923.

In the bigger picture, rise from 1.0351 (2022 low) should have already completed at 1.3433 (2024 high), and the trend has reversed. Further fall is now expected as long as 1.2810 resistance holds. Deeper decline should be seen to 61.8% retracement of 1.0351 to 1.3433 at 1.1528, even as a corrective move. However, firm break of 1.2810 will dampen this bearish view and bring retest of 1.3433 high instead.

Daily Pivots: (S1) 0.8991; (P) 0.9067; (R1) 0.9106; More…

USD/CHF is still extending the consolidation pattern from 0.9200 and intraday bias remains neutral. Outlook stays bullish with 0.8956/64 support zone intact. On the upside, firm break of 0.9200/9223 will resume the whole rally from 0.8374 and carry larger bullish implication. However, sustained break of 0.8964 will be a sign of reversal and turn bias back to the downside.

In the bigger picture, decisive break of 0.9223 resistance will argue that whole down trend from 1.0342 (2017 high) has completed with three waves down to 0.8332 (2023 low). Outlook will be turned bullish for 1.0146 resistance next. Nevertheless, rejection by 0.9223 will retain medium term bearishness for another decline through 0.8332 at a later stage.