Bullock says RBA to weigh August CPI lightly amid policy lag

Today's press conference with Reserve Bank governor Michele Bullock contained some notable points. She clarified the rate decision and the upside risks to inflation, but she also sought to stop markets from viewing tomorrow's August CPI report as a make-or-break indicator for the next move.

Bullock stated she would not put "too much emphasis" on the number, arguing that the RBA needs to consider future conditions rather than react mechanically to data from a month earlier.

The central theme is the lag in monetary policy's effects.

Before today, the RBA had already lifted rates three times between February and May. Bullock noted that the full impact can take 12 to 18 months to work through the economy. Her argument is that with today's hike added, a substantial portion of the tightening is still affecting mortgages, household spending and demand.

That does not make tomorrow's CPI report useless. Quite the contrary.

Bullock said that if the data matches expectations, it would confirm that inflation was "unacceptably high" in the first half of the year. But it would not necessarily reveal what inflation will be in a few months' time, let alone next year.

That is the key point for markets.

A strong CPI reading tomorrow could still boost the aussie and lead traders to price in another RBA rate hike, especially with upside inflation risks present. However, Bullock is clearly trying to reduce the chance that a single monthly figure becomes the whole policy story.

This is particularly relevant as traders remain undecided ahead of the November meeting, with the odds of another 25 basis point hike now at about 41%.

So the CPI report tomorrow will still be important. But if Bullock's message resonates, it may matter more as evidence of where inflation has been rather than as a clear signal of where rates are heading.