Inflation continues downward trajectory

The CPI indicator rose 3.5 per cent in the 12 months to July 2024, down from 3.8 per cent in June.

However, when excluding volatile items (such as fuel, fruit and vegetables, and holiday travel), underlying inflation was 3.7 per cent (down from 4.0 per cent in June).

The annual trimmed mean movement was 3.8 per cent in July, down from 4.1 per cent in June.

For the month of July, the most significant contributors to the annual rise were housing (4 per cent), food and non-alcoholic beverages (3.8 per cent), alcohol and tobacco (7.2 per cent), and transport (3.4 per cent).

Housing inflation falling

Looking at housing, inflation in this segment continues to fall from its heady heights and was down to 4 per cent from the 5.5 per cent rise recorded in June.

This was largely due to drops in electricity prices (which fell 5.1 per cent in the 12 months to July, down from a rise of 7.5 per cent in June), following the introduction of new Commonwealth and state rebates.

Leigh Merrington, the acting head of prices statistics at the ABS, said: “The first instalments of the 2024–25 Commonwealth Energy Bill Relief Fund rebates began in Queensland and Western Australia from July 2024 with other States and Territories to follow from August.

“In addition, State-specific rebates were introduced in Western Australia, Queensland and Tasmania. Altogether these rebates led to a 6.4 per cent fall in the month of July. Excluding the rebates, Electricity prices would have risen 0.9 per cent in July.”

The annual rise in new dwelling prices remained around 5.0 per cent (maintaining the trend seen since August 2023), with builders passing on higher costs for labour and materials.

Rents increased 6.9 per cent for the year to July, down from a rise of 7.1 per cent in the 12 months to June, which the ABS said reflected “continued tightness in the rental market in capital cities”.

While the monthly CPI figures only include some of the full CPI basket data (for example, monthly price data is only available for 48 per cent of the CPI basket), they provide a good indicator of what the quarterly CPI data may look like.

The quarterly inflation figures are a key consideration used by the Reserve Bank of Australia’s monetary policy board when it meets to determine the official cash rate.

The data for the June quarter 2024 revealed an annual increase of 3.8 per cent and a quarterly increase of 1 per cent. As such, the board held the cash rate at 4.35 per cent for August.

The next instalment of the quarterly CPI data (for the September quarter) will not be released until the end of October. As such, the next RBA cash rate decision (set for 24 September) will not be a ‘live’ meeting.

Moreover, the governor of the RBA, Michele Bullock, recently quashed hopes for any rate cuts in the near term, highlighting that inflation was still too high to warrant a drop in the 4.35 per cent cash rate in the near term (i.e. the next six months).

Bullock said last week that underlying inflation was still “too high” (though the RBA expects this will fall to around 3.5 per cent by the end of this year), adding that while inflation had dropped substantially since its peak, it is “still some way above the midpoint of the 2–3 per cent target range.”

Despite the continued warnings that the cash rate is unlikely to fall before the end of the year, several lenders have started dropping their rates out of cycle in a bid to win more home loan business.

Market reaction to CPI data

Noting the monthly figures, economists from ANZ said they did not think the July CPI data would “affect the RBA’s thinking, especially given it was the first month of the quarter, when a much lower share of services and non-tradables have price changes measures compared with goods and tradables”.

Westpac senior economist Pat Bustamante said that there were "positive signs" in the July figures, adding: "The underlying measures show inflation eased in July. Inflation, excluding volatile items and holiday travel, in seasonally adjusted terms eased back from 4.0%yr in June to 3.7 per cent yr in July. The monthly increase of 0.08 per cent in July was the lowest since July 2021 and down from 0.32 per cent last month, 0.42 per cent in the month of July 2023 and 0.71 per cent in July 2022.

"Some of the items only updated on the first month of the quarter are showing clear signs of disinflation, including clothing and footwear, and household items, which came in softer than we were expecting."

Similarly, the CE of Homeloanexperts.com.au, Alan Hemmings, said that while falling inflation levels were to be welcomed, he did not believe consumers should expect a rate cut anytime soon.

"Whilst it was great to see a decrease in inflation, it was basically driven by two factors: petrol; and rebates federal and state governments are paying to offset the cost of electricity. The energy rebates come through as a cost decrease but, in reality, electricity charges did not decrease without the impact of the rebates," he said.

"In petrol, we have seen price reductions over the last few weeks but the problem is petrol prices can be volatile. It would take only further escalation in Ukraine and the Middle East for us to see fuel prices increasing again.

“So, while this looks like good news, that can be deceiving; however, it is also not bad news, because the inflation rate is probably stable, so the Reserve Bank has less reason to increase the cash rate."

He continued: “We have seen lenders across the board lowering interest rates on home loans. This is usually an indicator that they believe the next move by the Reserve Bank will be a cut. What we don't know is when. I suspect sometime next year...I think it will continue to take a watching brief.

"We are still not seeing any major increases in unemployment so the RBA will be concerned that it will not take much for spending to increase and drive inflation. The only thing that may stop the RBA from standing still on the cash rate is a sudden shock in the economy, such as a quick increase in unemployment or sudden rises in prices.”

[Related: Major banks reducing rates out of cycle]