Australian consumer price inflation slowed to its lowest level in three years in August, thanks to government rebates on electricity costs, while core inflation fell to its lowest point since early 2022. This development could create opportunities for potential interest rate cuts in the future.
Despite this positive news, market reactions were muted as the Reserve Bank of Australia (RBA) has indicated that it will overlook the temporary decline in headline inflation, deeming it insufficient to justify immediate rate cuts. The Australian dollar retreated from its 1.5-year high, remaining steady at $0.6891, while three-year bond futures held steady at 96.63.
Swaps markets currently suggest a 75% probability that the RBA may begin lowering rates in December, following the central bank’s decision to maintain its policy stance without discussing the possibility of a rate hike during its recent meeting.
According to data released by the Australian Bureau of Statistics, the monthly consumer price index (CPI) rose at an annual rate of 2.7% in August, down from 3.5% in July and aligning with market expectations. This decline was largely attributed to electricity subsidies from both federal and state governments, which effectively reduced prices by nearly 15% in August; without these subsidies, prices would have increased by 0.1%. Additionally, petrol prices saw a decrease of 3.1% over the month.
Encouragingly, when volatile items and holiday travel costs were excluded, the CPI fell to 3.0%, at the upper end of the RBA’s target range of 2-3%, down from 3.7% in July. A closely monitored measure of core inflation, the trimmed mean, also slowed to an annual rate of 3.4%, down from 3.8% in July, with the RBA projecting it to be at 3.5% by year-end.
Harry Murphy Cruise, an economist at Moody’s Analytics, noted, “What really matters—and as the RBA keeps reminding us—is the sustainable return of underlying inflation to target. While we still have some way to go, August’s data indicates that momentum is moving in the right direction.” He expressed the view that rate cuts are unlikely until February but acknowledged that the risk of delays beyond that is diminishing.
Since November, the RBA has maintained a steady cash rate of 4.35%, a significant increase from the record low of 0.1% set during the pandemic. This rate is deemed restrictive enough to guide inflation back into the target range while supporting employment gains. However, underlying inflation, which registered at 3.9% in the last quarter, has shown minimal decline over the past year, leading to concerns among policymakers about inflation’s trajectory toward the target range.
Treasurer Jim Chalmers described the inflation figures as “heartening,” “encouraging,” and “welcome,” noting that several measures, including underlying inflation, have shown improvement. However, he cautioned against becoming overly optimistic, recognizing that monthly figures can be volatile and that inflation may not always decrease in a linear manner.
The monthly report also provided the first insights into services inflation for the quarter, which was recorded at 4.2% in August compared to the previous year, showing only a slight decline from July’s 4.4%.
Tony Sycamore, an analyst at IG, commented that if the declines in underlying inflation observed in the report are reflected in the crucial Q3 inflation numbers, it could lead to a dovish shift from the RBA during its meeting on November 5, potentially paving the way for a 25 basis point rate cut in December.
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