Inflation lowest in 3 years, but RBA says don’t expect a rate cut soon

Scott Kuru September 25, 2024 4 min read

Image from Krisztian Bocsi/Bloomberg

KEY POINTS

Australia's inflation rate fell to a 3-year low in August at 2.7%, down from 3.5% in July
Government cost of living relief, especially electricity rebates, drove much of the decline
The RBA cautions it will only consider rate cuts when underlying inflation shows sustained improvement

New data from the Australian Bureau of Statistics (ABS) shows Australian inflation has slowed substantially, chalking up its lowest reading in three years.

The monthly Consumer Price Index (CPI) indicator rose 2.7% in the 12 months to August 2024, much lower than the annualised 3.5% recorded in July.

This means headline inflation is back within the Reserve Bank of Australia’s 2-3% target range.

However, even before the figures were released, RBA Governor Michele Bullock said the central bank would need to see much more evidence of “sustainably” lower inflation in Australia before even considering cutting official interest rates—currently at a 13-year high of 4.35%.

The details

The ABS says annual inflation was 2.7% in the 12 months to August 2024, with the most significant price rises occurring in the Housing (+2.6%), Food and non-alcoholic beverages (+3.4%), and Alcohol and tobacco (+6.6%) categories.

But behind the huge fall in the monthly inflation rate (3.5% in July to 2.7% in August) was the full impact of large government electricity rebates designed to address cost of living pressures.

Because these rebates are paid directly to power retailers, who then deduct these amounts from household bills before they are mailed out to consumers, this led to electricity bills in Australia falling a whopping 17.9% in the 12 months to August, down from a 5.1% annual fall in July.

As the ABS points out, “This is the largest annual fall for Electricity on record.”

“The combined impact of Commonwealth Energy Bill Relief Fund rebates in all States and Territories in addition to State rebates in Queensland, Western Australia and Tasmania drove the annual fall in electricity prices.”

The impact of these rebates has dragged inflation down, back into the Reserve Bank’s 2-3% target range for the first time since October 2021.

Critics have argued that the rebates “artificially” lowered Australia’s headline inflation rate in an attempt to get the RBA to deliver a rate cut sooner.

But Treasurer Jim Chalmers has countered that there’s “nothing artificial about helping people with their power bills.”

RBA not fooled

Speaking before the release of the inflation data, the RBA Governor Michele Bullock was blunt.

“The point I would make is that if tomorrow we get an inflation number with a two in front of it, so it’s back in the (2-3% target) band, that doesn’t mean that we’ve got inflation under control.

“It doesn’t mean that inflation is sustainably back within the band,” Ms Bullock said as she announced that the RBA board had decided to keep rates on hold at 4.35% for the tenth straight month.

The Reserve Bank’s preferred measure of inflation is the so-called “Trimmed mean” measure rather than the “Headline” rate.

As the Bureau of Statistics explains, “the Trimmed mean is an alternative measure of underlying inflation that reduces the impact of irregular or temporary price changes.”

“Annual Trimmed mean inflation, which excluded both the falls (in August 2024) in Automotive fuel and Electricity, alongside other large price rises and falls, was 3.4% in August, down from 3.8% in July.”

Although inflation by that measure is coming down, it is still well above the RBA’s 2-3% target.

“We really need to see progress on underlying inflation coming back down toward the target,” the RBA Governor explained at her press conference.

When will we get a rate cut?

Money markets have priced in about a 70% chance of a 0.25% rate cut by Christmas this year, but most economists are more cautious.

“There are positive signs for inflation, but the RBA Governor’s guidance was clear – the RBA Board is looking through the month-to-month volatility to the underlying measures,” says Westpac Senior Economist Pat Bustamante.

“We will get a fuller picture when we receive the September quarter CPI.”

Westpac still expects the RBA to start cutting rates in February next year, as does the ANZ bank.

However, ANZ Senior Economist Catherine Birch noted that Michele Bullock said, “the RBA expects the recent slow progress on underlying disinflation to continue” into the September quarter.

It’s also worth looking at the RBA’s own inflation forecasts to get an idea of what the bank thinks is happening with inflation.

The central bank’s latest Statement of Monetary Policy - released in August - shows the RBA only expects Trimmed Mean inflation to get back under 3% in December 2025 when it is forecast to be 2.9%.

Stressed Australian homeowners who are paying the highest retail mortgage rates in a generation will be hoping that the central bank’s forecasts are wrong - very, very wrong.