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Inflation slowdown - what does this mean for interest rates in July?

Peter Terlato avatar
Peter Terlato
- 4 min read
Inflation slowdown - what does this mean for interest rates in July?

Following an unexpected jump the month prior - apparently owing to volatile price changes -  inflation slowed significantly over the month of May, according to the latest independent figures.

The Australian Bureau of Statistics (ABS) monthly Consumer Price Index (CPI) indicator rose 5.6% in the twelve months to May 2023. This represents a 1.2% month-on-month decrease in annual inflation.

This is the smallest increase in annual inflation since April last year. While prices have kept rising for most goods and services, many increases were actually smaller than those seen in recent months.

What caused the turnaround in inflation?

Volatilite price movements have wildly disrupted the ABS' monthly CPI data drops. Volatile items include fruit and vegetables, automotive fuel, and holiday travel and accommodation.

Annual inflation had gradually been declining after peaking in December 2022 (8.4%). However, the monthly reporting series recorded an uptick in CPI between March (6.3%) and April (6.8%). ABS head of price statistics Michelle Marqardt suggested that, if items with volatile price movements were excluded from the data, headline inflation actually depreciated over this period.

For context, the latest annual movement in monthly CPI excluding volatile items rose 6.4% in May, only slightly below April's 6.5% rise. This means that headline inflation remained relatively unchanged month-on-month.

The monthly reporting series is relatively new, beginning in September 2022. While these more frequent releases may provide additional context to help guide monetary policy decisions, the quarterly CPI indicator remains the key measure of inflation in Australia.

The most significant contributors to May's inflation figures were increased costs in the areas of housing (8.4%), food and non-alcoholic beverages (7.9%) and furnishings, household equipment and services group (7.1%). 

A significant decline in automotive fuel prices (-8.0%) helped to offset other rises. This is in stark contrast to last month, when volatile fuel costs were a primary contributor to the increase in the annual CPI movement for April.

“The annual movement for automotive fuel remains volatile, partly reflecting price changes from 12 months ago. Annually automotive fuel prices fell 8.0% in May, compared to a rise of 9.5% in April,” Marquardt said.

Automotive fuel May 2023 (CPI)

How will this affect interest rates?

Economists have had a hard time predicting the RBA's cash rate calls the past few months. Although this latest data suggests signs of disinflation, when you exclude volatile items, annual inflation remains sticky and persistant.

The RBA has lifted the cash rate 12 times over the last 14 months - taking it to 4.10%, the highest it’s been in 11 years.

Following June's hike, Westpac, ANZ and NAB amended their forecasts to a peak of 4.60% by August - signalling two more 25 basis-point hikes over the next two months. CommBank has the chances of a hike in July at 50/50.

These latest estimations and projections illustrate a significant reversal compared to last month's outlook, when just one of Australia’s big four banks had pencilled in another rate hike for 2023.

In his latest statement on monetary policy earlier this month, RBA governor Philip Lowe said expectations of ongoing high inflation have contributed to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the still very low rate of unemployment.

“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.

Households are struggling under the pressure of rising costs and soaring interest rates. Mortgage holders with a $500,000 loan at the start of the central bank’s hiking cycle in May 2022 can expect total monthly loan repayments to have risen by $1,134, assuming the lender has passed on every cash rate hike in full.

For all these reasons, and more, Australia’s economic outlook for the remainder of 2023 remains uncertain. Still, economists have offered some optimistic notions and remain confident we'll outperform other advanced economies.

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Product database updated 28 May, 2024

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.