CPI now within RBA target band

The Australian Bureau of Statistics (ABS) has released the monthly Consumer Price Index (CPI) for August 2024, revealing that the inflation indicator rose 2.7 per cent in the 12 months to August, down from 3.5 per cent in July.

Michelle Marquardt, ABS head of prices statistics, said that this was the lowest reading since August 2021.

The largest contributors to the falling CPI figures were electricity – largely driven by the government’s $300 energy rebates, which came into effect in July 2024 – and falling petrol/automotive fuel costs.

In fact, the combined impact of Commonwealth Energy Bill Relief Fund rebates and state government rebates in Queensland, Western Australia, and Tasmania drove the largest annual fall in electricity prices on record (17.9 per cent).

Marquardt said: “The falls in electricity and fuel had a significant impact on the annual CPI measure this month.”

She said that rebates actually led to a 14.6 per cent fall in electricity prices in the month between July and August, after a 5.1 per cent annual fall in July.

“Excluding the rebates, electricity prices would have risen 0.1 per cent in August and 0.9 per cent in July,” Marquardt said.

Meanwhile, automotive fuel was 7.6 per cent lower than August 2023, for example, after price falls in recent months.

Indeed, the average monthly price of unleaded petrol in August 2023 was $2.00 per litre, while in August 2024, the average monthly price dropped to $1.85 per litre.

What will the RBA do?

The monthly inflation number is now within the Reserve Bank of Australia’s target band (2–3 per cent), which the central bank has suggested it is targeting before looking at reducing the official cash rate.

At its monetary policy meeting yesterday (24 September), however, RBA governor Michele Bullock foresaw that energy rebates would be artificially cooling inflation, saying that inflation would need to be “sustainably” returning to target within a reasonable time frame.

She said: “Headline inflation is expected to fall further temporarily, as a result of federal and state cost of living relief. However, our current forecasts do not see inflation returning sustainably to target until 2026.

“In year-ended terms, underlying inflation has been above the midpoint of the target for 11 consecutive quarters and has fallen very little over the past year.

“While headline inflation will decline for a time, underlying inflation is more indicative of inflation momentum, and it remains too high. The most recent projections in the August SMP show that it will be some time yet before inflation is sustainably in the target range.

“Data since then have reinforced the need to remain vigilant to upside risks to inflation and the board is not ruling anything in or out.

“Policy will need to be sufficiently restrictive until the board is confident that inflation is moving sustainably towards the target range.”

She also reaffirmed the board’s dedication to bringing the cash rate to the midpoint of the 2–3 per cent target range (which is not forecast to come back into band until the end of 2025 and to the midpoint of the target until 2026).

Bendigo Bank’s chief economist David Robertson said: “While today’s data was the monthly indicator and only a subset of the full Q3 CPI report out on October 30, the numbers are very encouraging for rate cuts in 2025, and certainly brings a February rate cut back into play.

“Bendigo Bank’s forecast for the easing cycle to commence in 2025 and not earlier has been unchanged since January 2023, although the precise timing (February or May 2025) remains a close call. Today’s data certainly helps the case for a February cut, however, upcoming data and events will keep markets guessing between now and then, including the US Presidential election in November. We continue to expect at least three rate cuts next year.

“The lower read for CPI at 2.7 per cent (in the 12 months to August) was as forecast given the impact of electricity rebates in state and federal budgets, but the lower read for underlying inflation at 3.4 per cent was lower than forecast and bodes well for steady progress in the months ahead.

“This data matched the hint of dovishness from Michele Bullock yesterday when she stated that a hike was not considered in policy deliberations; although equally she effectively ruled out a cut this calendar year in the absence of a significant shock.”

What’s been driving inflation?

According to the August CPI data, the cost of housing was one of the leading contributors to rising inflation (up 2.6 per cent), having fallen from 4.0 per cent in July 2024.

However, the ABS said that the falls in electricity prices were partly to account for this. For example, rents were actually up 6.8 per cent in the year to August, reflecting “continued tight rental markets in most capital cities”.

Similarly, new dwelling prices, which capture new builds and major renovations, rose 5.1 per cent in the year to August and have remained around 5 per cent since August 2023, with builders passing on higher costs for labour and materials.

Food and non-alcoholic beverage costs were up 3.4 per cent while rising alcohol and tobacco costs – which were up 6.6 per cent – were the largest growth sector.

Transport costs, however, were down 1.1 per cent, with some states, such as Queensland, having introduced much lower fares across public transport (there is currently a 50¢ flat fare across all city trains, buses, ferries, and trams in Brisbane at the moment).

Marquardt said: “When prices for some items move by large amounts, measures of underlying inflation like the CPI excluding automotive fuel, fruit and vegetables and holiday travel, and the trimmed mean can provide additional insights into how inflation is trending.”

When excluding these items, CPI was 3.0 per cent in August, down from 3.7 per cent in July.

Annual trimmed mean inflation, which excludes the drops in fuel and electricity, alongside other large price rises and falls, was 3.4 per cent in August, down from 3.8 per cent in July.

“Both measures of annual underlying inflation in August are the lowest they have been for 2.5 years,” Marquardt said.

[Related: September–October cash rate decision called]

Written by Annie Kane

Last Updated: 25 September 2024

Published: 25 September 2024