Inflation dived last month to its lowest rate in three years as government cost-of-living relief and cheaper petrol helped household budgets – but the Reserve Bank will wait for a more sustained drop before it starts cutting interest rates.
Headline consumer price inflation in August was 2.7%, the slowest increase since August 2021, the Australian Bureau of Statistics said on Wednesday. That compared with the 2.7% rate expected by economists and July’s 3.5% annual pace.
The underlying inflation measure, which strips out more volatile price movers, also fell. Known as the trimmed mean, this gauge came in at 3.4%, down from July’s 3.8%.
Electricity prices fell by a record 17.9% thanks to government rebates, while automotive fuel was 7.6% cheaper. “Excluding the rebates, electricity prices would have risen 0.1% in August and 0.9% in July,” said Michelle Marquardt, ABS’s head of prices statistics.
Renters, though, didn’t get much relief, with the annual increase at 6.8%, slightly lower than previous months.
Food and non-alcoholic beverages were 3.4% higher than in August 2023, easing from the 3.8% annual increase registered in July. It was the lowest reading since February 2022.
While the inflation slide will be welcomed by households, it is unlikely to sway the Reserve Bank governor, Michele Bullock. She wants to see the more comprehensive September quarter numbers, due out on 30 October, but is doubtful the drop will be enough yet to prompt an interest rate cut.
“The board needs to be confident that inflation is moving sustainably towards the [2-3%] target before any decisions are made about a reduction in interest rates,” Bullock said on Tuesday. “Progress in getting underlying inflation down has slowed and is likely to have remained slow in the September quarter.”
Still, Bullock’s admission that the RBA board did not “explicitly” consider lifting its cash rate at this week’s meeting shifted market expectations. Investors bet there is about a one-in-four chance of a rate cut in November and a two-in-three chance by December, prior to today’s inflation release.
The inflation figures were much as the market anticipated, with the Australian dollar hovering near 18-month highs at just below 69 US cents. Stocks were little changed on the day.
David Bassanese, Betashare’s chief economist, noted underlying inflation was less than the 3.5% forecast by the RBA for the December quarter.
“If annual trimmed mean inflation does not once again lurch higher, but continues its recent trajectory lower, there is a growing chance it could reach the mid-point of the RBA’s 2-3% target band by year-end, which would be significantly better than current RBA forecasts,” Bassanese said.
“If so, there would be a good chance the RBA could cut interest rates before Christmas.”
Among other key items, the cost of building new homes or major renovations rose 5.1% from a year earlier. This gauge has remained at about 5% for the past year, “with builders passing on higher costs for labour and materials”, the ABS said.
The treasurer, Jim Chalmers, said the August inflation numbers were “very welcome, very encouraging and very heartening numbers”.
“Whether it is rent, energy rebates, our cost-of-living policies are an important part of the story but not the whole story here,” Chalmers said, noting rental increases would have been at an annual pace of 8.6% without the commonwealth’s rent assistance.
“We are seeing right across a number of measures of inflation including underlying inflation that it has come off considerably in the new numbers that we see today,” he said.
The shadow treasurer, Angus Taylor, said however that on average prices had “risen by now 10% since Labor came to power”, with those for “working families” up by more than 18%.
“Our core inflation is higher than every other advanced country, peer country, in the world other than the UK and that is not one I would be wanting to compare myself with just now,” Taylor said.
