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Inflation continues to cool: How will this affect interest rates in September?
The annual inflation rate continues to contract, falling month-on-month in July, according to the latest economic data.
The Australian Bureau of Statistics’ (ABS) monthly Consumer Price Index (CPI) indicator rose 4.9% in the 12 months to July 2023. This means that the pace of annual inflation has slowed, when compared to the 5.4% rate reported in June's monthly release. July’s result is also significantly lower than the quarterly figure for June, which was a flat 6.0%.
The biggest contributors to July's annual increase were housing (+7.3%) and food and non-alcoholic drinks (+5.6%). Inflation was alleviated in July as a result of price falls for automotive fuel (-7.6%) and fruit and vegetables (-5.4%).
However, volatile price movements can distort the monthly CPI data drops. Volatile items include fruit and vegetables, automotive fuel, and holiday travel and accommodation. It can be helpful to exclude these items from the headline CPI indicator to provide a more accurate view of underlying inflation.
"When excluding these volatile items, the decline in annual inflation is more modest at 5.8 percent in July, compared to 6.1 percent in June," ABS head of prices statistics Michelle Marquardt said.
"The Energy Bill Relief Fund provided eligible households with rebates ranging from $43 to $250 in July. If we exclude the impact of rebates from the figures, electricity prices would have recorded a monthly increase of 19.2 percent."
In April, following three straight months of decline, volatile price movements caused headline inflation to jump unexpectedly. May's monthly indicator saw the pace of inflation return to its downward trend and it's been diminishing ever since. These statistical irregularities demonstrate the usefulness of the monthly data series.
How will this affect interest rates?
The RBA has lifted the cash rate 12 times over the last 15 months - taking it to 4.10%, the highest it’s been in 11 years.
In August, the RBA left the cash rate on hold for the second consecutive month. Following this decision, three of the four big banks are advocating that the cash rate has officially peaked, meaning no further cash rate hikes are forecast to occur in the short term. However, NAB has not changed its prediction that one more hike may occur in late 2023. The banks also suggest that cash rate cuts could occur as early as March 2024.
The continued decrease in headline inflation, although mild, could encourage the RBA Board to maintain the status quo when it meets next week to determine the cash rate. However, it's important to note that this relatively new monthly series is supplemental to the more authoritative quarterly CPI figures. While the level of inflation is obviously a significant influence on the decision-making policy, there are a number of other key economic factors to consider.
In his latest statement on monetary policy earlier this month, RBA governor Philip Lowe highlighted that while higher interest rates are working to balance supply and demand, inflation is still too high, services price inflation has been surprisingly persistent, and household consumption continues to be a significant source of economic uncertainty.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” Lowe said.
Australia, like most of the rest of the world, seems destined to encounter some form of economic hardship and a spell of weak growth. While there is much debate over whether or not Australia will enter into a recession, it may be more prudent to question the extent to which this forecast slump in economic activity will affect consumer confidence and household debt, and for how long?
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Product database updated 04 May, 2024
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