Red hot AU CPI print turns the blowtorch on RBA and ASX 200

On this day one year ago, the annual rate of headline inflation rose to a higher-than-expected 3.5% to put the market on notice that the inflation genie had escaped the bottle.

Twelve months later, despite a record 325bp of RBA rate hikes, headline inflation shocked today as it rose by 1.9% QoQ, taking the annual inflation rate to 7.8% YoY from 7.3% in September.

The trimmed mean or core inflation (the RBA's preferred measure of inflation) rose by 1.7% QoQ, taking the annual rate to 6.9% - the highest level since the ABS first published the series in 2003.

According to the ABS, "the most significant price rises were Domestic holiday travel and accommodation (+13.3%), Electricity (+8.6%), International holiday travel and accommodation (+7.6%) and New dwelling purchase by owner-occupiers (+1.7%)."

The substantial rise in electricity prices was not unexpected due to the unwinding of electricity rebates this quarter in Perth and Canberra, partially offset by new rebates introduced in QLD and Tasmania.

Providing some relief, the rate of price growth in New Dwelling purchases continued to ease, "reflecting subdued new demand and improvements in the supply of materials."

Before this morning's release, the Australian interest rate market was 50% priced for a 25bp interest rate hike at the RBA's February Board meeting, which would take the cash rate to 3.35%.

The higher-than-expected CPI print has been the catalyst for an aggressive sell-off in the rates market, and the rates market is now 76% priced for a 25bp rate hike to 3.35% on February 7.

The expectation of higher interest rates has weighed on the ASX 200, causing it to peel from a fresh nine-month high this morning at 7507 to be trading 22 points lower at 7468 at the time of writing.

The RBA and the ASX 200 will hope that evidence soon emerges that inflation has peaked in Australia and begun to cool in line with the trend as seen in the UK, Euro Area and the US of late.

What do the Charts Say?

At this morning's high, the ASX 200 was up almost 7% for January, just 1.5% below its bull market 7632 high.

The January rally in the ASX 200 has taken the RSI into overbought territory. For the Elliott Wave enthusiasts, a five-wave advance from the October 6411 low can also be viewed on bearish RSI divergence, which warns of a pullback.

Ahead of the end of the month, we continue to favour trimming ASX 200 longs ahead of the bull market 7632 high and would then look to buy a sustained break of the 7632 high or a pullback into the 7200/7000 support area.

ASX 200 daily chart

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