ASX 200 surges higher on latest Australian inflation print

The ASX 200 leapt higher as investors priced in lower odds of another RBA rate hike in July following the latest inflation data.

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The S&P/ASX 200 Index (ASX: XJO) was enjoying a solid run already today.

The benchmark index was up a healthy 0.6% at 11:30am AEST on Wednesday.

That's when the latest Australian inflation data was released, covering the month of May.

And the ASX 200 rocketed another 0.7% in the minutes that followed.

Here's why.

ASX 200 leaps higher on subdued inflation data

Consensus forecasts had pencilled in expectations for annual inflation to come in at 6.1% through to the end of May.

As witnessed by the big extra leap late morning on the ASX 200, those median expectations proved overly pessimistic this month.

According to the latest data from the Australian Bureau of Statistics (ABS), the monthly Consumer Price Index (CPI) indicator rose 5.6% in the 12 months to May 2023.

That's a big step down from the 6.8% reported last month.

Commenting on the inflation print, ABS head of prices statistics Michelle Marquardt said:

This month's annual increase of 5.6% is the smallest increase since April last year. While prices have kept rising for most goods and services, many increases were smaller than we have seen in recent months.

But ASX 200 investors aren't out of the inflation woods yet.

Marquardt pointed to a lesser decline in underlying inflation, which excludes items with volatile price changes from the headline CPI indicator.

"When excluding these volatile items, the decline in inflation is more modest," she said.

The annual increase for the monthly CPI indicator was 6.4% in May, only a hair lower than April's 6.5% print, though significantly below the peak of 7.3% recorded in December.

The door is open for an RBA pause

One of the tailwinds pushing the ASX 200 higher on the heels of the subdued inflation figure is lower odds of a July interest rate hike from the Reserve Bank of Australia (RBA).

Market analyst at eToro Josh Gilbert said before the ABS release, "A reading below 6.1% should be met with optimism from the market, given it shouldn't ignite any further hawkishness from the Reserve Bank."

But it remains to be seen if the 5.6% reading will be enough to prevent any further rate hikes.

According to Gilbert:

We would likely need to see a 'stupendous' number to stop the RBA from hiking by another 25 bps in July, given a red-hot labour market and the board's continuous declarations of inflation being too high.

ASX 200 investors will find out soon enough.

The RBA will announce its next rate decision at 2:30pm AEST on Tuesday.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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