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Inflation cooled more than forecast over the 12 months to July, as fuel and fruit and vegetable prices fell, while housing costs continued to rise.
Key points:
- The monthly consumer price index recorded an annual rise of 4.9 per cent in July
- Excluding volatile items like fuel, fruit and vegetables and travel, the decline in underlying inflation was more modest
- Capital Economics says there's little chance the RBA will hike interest rates again this year and forecasts cuts next year
The Australian Bureau of Statistics (ABS) monthly index shows consumer price rises easing to an annual pace of 4.9 per cent last month, down sharply from 5.4 per cent in June.
It is also well below the closely-watched quarterly consumer price index (CPI), which pulled back to a 6 per cent annual increase in the June quarter.
Economists polled by Reuters had tipped inflation to slow to 5.2 per cent, although the forecasts ranged from 4.7 per cent to 5.9 per cent.
"Annual price rises continue to ease from the peak of 8.4 per cent in December 2022," ABS head of prices statistics Michelle Marquardt said.
Fuel prices fell 7.6 per cent in July, while fruit and vegetable prices were down 5.4 per cent.
But these are considered more volatile components of the CPI.
"It can be helpful to exclude these items from the headline CPI indicator to provide a view of underlying inflation.
"When excluding these volatile items, the decline in annual inflation is more modest at 5.8 per cent in July, compared to 6.1 per cent in June," Ms Marquardt noted.
The inflation update comes ahead of the Reserve Bank's September board meeting on Tuesday, the final under outgoing governor Philip Lowe, who will be replaced by his deputy Michele Bullock mid-next month.
However, the RBA plays closer attention to the ABS quarterly inflation figures, next due out in October.
The central bank expects headline inflation to slow sharply, to 4.1 per cent by the December quarter this year, with its preferred measure of underlying inflation forecast to return to its 2 to 3 per cent target band by mid-2025.
Housing price rises remain substantial
Housing was the biggest contributor to the annual increase in July, up 7.3 per cent — little changed from the 7.4 per cent rise over the year to June.
New dwelling prices rose 5.9 per cent, which the ABS says is the lowest annual rise since October 2021, as building materials inflation eases.
But the tight rental market continues to drive rents up, by 7.6 per cent.
"There is no end in sight to those supply-side issues in terms of housing in this country," Angela Jackson from Impact Economics told The Business.
"We'd expect rental inflation to continue, if not strengthen — certainly to stay elevated, and that will put upward pressure on inflation."
Electricity prices rose 15.7 per cent in the year to July, and 6 per cent from the previous month, reflecting scheduled energy price increases, while being offset by various rebates.
"The Energy Bill Relief Fund provides eligible households with rebates ranging from $43.75 to $250 in July. If we exclude the impact of rebates from the July 2023 figures, electricity prices would have recorded a monthly increase of 19.2 per cent," Ms Marquardt said.
Capital Economics expects the expiry of the rebates to lift inflation by 0.3 percentage points in coming months, but still expects the "rapid fall" to be welcome news for the RBA.
"Electricity prices (even with rebates) and rents remain a big concern, putting upward pressure on consumer prices," Indeed economist Callam Pickering said.
"These are items where it is very difficult for consumers to reduce spending."
Easing inflation supports RBA on hold
Prior to the release of the July inflation data, market pricing from Refinitiv put the chance of a rate hike on Tuesday at less than 5 per cent.
After the figures were released, the chance of no change at the September meeting had risen to 99.5 per cent.
"The sharp fall in inflation in July confirms that the RBA is done tightening and raises the chances that the bank will start to ease policy earlier than most anticipate," Capital Economic's Asia-Pacific head Marcel Thieliant wrote.
"There’s little chance that the RBA will deliver the final rate hike in the fourth quarter that most analysts were anticipating before the release of today’s data.
"The bigger question is when the rapid slowdown in inflation will prompt the RBA to cut interest rates.
"If our view that the economy entered a recession in the third quarter of this year proves correct, the risks are tilted towards rate cuts starting earlier than our current forecast of Q2 2024," Mr Thieliant argued.
Mr Pickering agreed that there was no strong argument for a hike in September, due to softer-than-expected wage growth and employment, alongside the inflation figures.
"Right now, we believe the RBA's tightening cycle is over."
Betashares chief economist David Bassanese also forecasts the RBA to remain "comfortably on hold".
"My base case remains that the RBA has now concluded raising interest rates," Mr Bassanese said.
"It will remain on hold for the remainder of this year with the first interest rate cut now expected in April 2024, with two further rate cuts pencilled in over the remainder of next year."
Dr Jackson doesn't think anything is "set in stone" and that the central bank will now be very dependent on the data flow, but if there is to be another rate rise, she doesn't expect it at Philip Lowe's final meeting.
"It would be advantageous in terms of the handing of the baton — and people might have a different view of this — if the next rate rise came under a new governor.
"The reason for this is that it would send a signal to the market that we remain serious under the new leadership, we are going to keep a lid on inflation going forward."
Pace of price rises slows but people still feeling the pinch
While the data shows the overall pace of inflation easing, many prices are still on the rise, and many households aren't feeling much relief.
Melbourne rideshare driver Ian Hymans has been feeling the pinch, as insurance and fuel costs eat into his income.
When The Business spoke with him two years ago, he was concerned about petrol prices hitting $2 a litre, which has now become a reality.
He's since switched to a diesel car but hasn't found it more cost effective yet.
Mr Hymans has been speaking with his passengers about the pressure they are under, and is hearing the same thing from fellow drivers, many of whom are taking to gig economy work for the first time.
"Some of the guys I've spoken to are saying, 'Yeah, I do it because I need to supplement my income, the cost of living has gone up.'"
Unlike many, Mr Hymans and his wife have avoided a rent increase this year, which he puts down to a good landlord.
"We're luckier than a lot of other people — I think we're very fortunate."
Despite the pressures many are under, he's found that people are still going out on the weekends and demanding his services.
"What I do is a small business, I work six days a week… Some weeks are better than others, but look if I wasn't making a living, I wouldn't be doing it, plain and simple."