When it comes to inflation, what the Reserve Bank cares about is the underlying rate.
That rate removes big one-off increases or decreases in the price of goods and services to make for a more consistent and less volatile reading.
For example, in the latest result, tobacco prices rose more than 15 per cent, but that was mainly due to a 25 per cent tax increase on cigarettes, so the RBA won't take that number into consideration in calculating the underlying rate.
At 2.7 per cent annually, the underlying rate is within the RBA's two to three per cent target ban -- a setting it hasn't been at in almost three years.
That surely means an interest rate in August, and in the middle of the federal election campaign, won't happen.
The latest CPI result certainly surprised the market and that was made obvious by the language used by many economic research notes.
Barclays Capital said “Q2 CPI suggests Goldilocks has moved to Australia”.
CommSec titled its note, “Inflation: A beautiful set of numbers”.
So what's keeping inflation low? One major contributor is the retail sector.
All it takes is one look at those red labels with the words “sale” or “discount” stamped across the major department stores across the country. Retailers are cutting prices drastically in order to keep consumers spending.
Mortgage holders will certainly be happy with the numbers, while the Housing Industry Association says the burning issue for the housing industry is reducing the myriad of obstacles to new housing supply, including finding a better model for funding Australia's urban residential infrastructure.
Economists seem pretty unanimous on the fact that the RBA will take a 'wait and see' approach until at least November, following the October release of the next set of CPI numbers.
The jobs market is healthy, wages are higher and wealth is back at record levels.
This may lead to an increase in consumer sentiment later this year, leading to a pick up in spending.
But even if the RBA doesn't lift the official cash rate on August 3 --or before the end of this year -- that doesn't mean that mortgage rates won't increase.
Craig John from Bell Potter notes that a fly in the ointment is the possibility that retail banks push for an independent rate hike because of the increased cost of funds.
But then again, we are in the middle of an election campaign, so that is highly unlikely.
