Australia’s inflation rate eased to 4.9% in July, down from 5.4% in June

Australia’s inflation rate eased last month to its lowest level in 17 months, led by falling prices for fresh produce and automotive fuel, reducing the likelihood the Reserve Bank will need to raise interest rates again.

The consumer price index for July came in at an annual rate of 4.9%, the Australian Bureau of Statistics reported on Wednesday. That rate was slower than the 5.4% pace in June, and compared with economists’ forecast that CPI would drop to 5.2%.

Monthly inflation numbers can be volatile, particularly at the start of the financial year when a range of prices such as electricity are adjusted. The ABS had also indicated the July numbers would carry a higher than usual weighting for changes in goods prices and that later months would pick up more adjustments in services costs.

Excluding more volatile items, the July inflation rate was 5.8%, down from an annual pace of 6.1% in June, said Michelle Marquardt, head of prices statistics at the ABS.

Propellants of prices included housing, which rose at an annual clip of 7.3% in July, while food and non-alcoholic beverages were up 5.6%. Countering those increases were drops of 5.4% from a year earlier for fruit and vegetables, and 7.6% for automotive fuel.

Borrowers and the RBA will be among those scrutinising the CPI changes closely. Prior to the release of today’s figures, investors had all but ruled out the central bank lifting its key interest rate at next Tuesday’s board meeting.

In the wake of the numbers, the Australian dollar shed about 0.2 US cents to trade recently at 64.5 US cents. Investors also pared expectations of borrowing costs for businesses, extending the day’s gains for the ASX 200 share index to more than 1%.

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The treasurer, Jim Chalmers, welcomed the lower CPI rate as “an encouraging result, but we know Australians are still under the pump”.

“It’s pleasing to see inflation is moderating but we know it will remain higher than we’d like for longer than we’d like,” Chalmers said. “This data makes it very clear our energy price relief plan is working as intended by helping to take some of the sting out of power price rises when people need it most.”

Electricity prices were among the services sharply higher in cost, rising 15.7% from a year ago in July. That was up from a 10.2% annual rate of increase in June.

“The energy bill relief fund provides eligible households with rebates ranging from $43.75 to $250 in July,” Marquardt said. “If we exclude the impact of rebates from the July 2023 figures, electricity prices would have recorded a monthly increase of 19.2%.”

Gas prices were also higher, up 13.9% from July last year. The increase, though, was smaller than the 22.2% annual pace set in June.

The trimmed mean measure of inflation was 5.6% in July, down from 6% in June. The RBA expects the 2-3% target range will be reached by the middle of 2025.

Overall, the annual rate of goods inflation eased to 4.4% in July from 4.7% in June, CBA noted. Services inflation also moderated to 5.6% last month from 6.3% in June.

Prior to today’s release, however, some economists had predicted that July’s CPI decline may be reversed in August. Automotive fuel prices, for instance, have lately exceeded $2 per litre of petrol, nearing the highest since mid-2022, according to the Australian Institute of Petroleum.

David Bassanese, an economist with BetaShares, said the July inflation data “further cements the case for the RBA leaving interest rates unchanged at its policy meeting next week”. He predicted the next central bank move would be an interest rate cut next April with two additional cuts by the end of 2024.

“Provided overall inflation keeps moderating, Australia may not need to suffer an extended period of below-trend growth or even a so-called ‘per capita recession’,” Bassanese said. “The unemployment rate consistent with inflation returning to target could be much less than the 4.5% [peak] rate currently assumed by the RBA.”