Australia’s July CPI is lower year-on-year but the nation’s treasurer says it needs to drop “further and faster”
Australian inflation eased to a four-month low in July thanks in part to government rebates on electricity bills, but the overall progress in controlling price increases fell short of expectations, causing markets to reduce the likelihood of a near-term interest rate cut. The consumer price index (CPI) rose by 3.5% year-on-year in July, down from 3.8% in June, according to data from the Australian Bureau of Statistics released on Wednesday.
In an interview with Australia’s national radio brodcaster, Australia’s Treasurer, Jim Chalmers says, “We need it to fall further and faster, you know, we’ve made that clear, but yesterday’s numbers were pretty welcome and quite encouraging,
The result was slightly above the forecasted 3.4%, prompting markets to lower the odds of a Reserve Bank of Australia rate cut in November to below 50%. The Australian dollar increased by 0.1% to $0.6803, close to its highest level this year, while the three-year bond yield climbed by 4 basis points to 3.559%.
Month-to-month, the CPI remained unchanged from June as electricity prices fell by 6.4% and petrol dropped by 2.6%. However, rents, food, and gas prices rose.
In a note to investors, AMP Deputy Chief Economist, Diana Mousina expects inflation to continue to ease, saying, “While a lot of the fastest growing prices are still concentrated in services items, they tend to show the lagged impact from previous inflation indices. For example, health, car and home content insurers have raised premiums this year citing increasing labour and equipment costs; but both wages growth and goods inflation in these industries have rolled over. Rents which remained high at 6.9%yoy will also come down following recent easing [albeit slowly] in advertised listings.”
Speaking to Reuters, Harry Murphy Cruise, economist at Moody’s Analytics, criticised the inflation report, stating, “July’s inflation data seems misleading. Although it appears that progress has been made against inflation, much of this improvement is due to rebates that artificially reduced electricity costs. While this makes the headline inflation figure look better, prices in reality remain unchanged.”
The slowdown in headline inflation was largely due to federal and state government electricity subsidies, which began in Queensland and Western Australia last month, with other regions to follow in August. Without these rebates, the ABS estimates electricity prices in July would have increased by 0.9%.
The Reserve Bank of Australia (RBA) has raised interest rates by 425 basis points to 4.35% since May 2022 to combat inflation. However, the gradual decline in underlying inflation, which is not expected to return to the target range until late 2025, has led policymakers to rule out a near-term rate cut.
Reuters reports Tapas Strickland, National Australia Bank economist, saying, “The July report indicates limited progress in goods disinflation. Unfortunately, there is no detailed insight into the services sector, so the data doesn’t provide a complete picture, but it suggests minimal progress on the goods side.”
Market analysts are still anticipating a rate cut this year, led by the expected easing of policy by the U.S. Federal Reserve next month, as well as potential rate cuts in Canada, Europe, and New Zealand.
The strong Australian dollar, near its highest level this year, should also ease inflationary pressures in an economy with a low manufacturing base and reliant on imported goods.
Marcus Reubenstein
