Inflation numbers should pave the way for rate cuts

Data from the Australian Bureau of Statistics (ABS) shows annual inflation in Australia moderated in July 2024, down from 3.8% in June.

The monthly Consumer Price Index (CPI) data from the ABS shows the full effect of the power rebates governments have offered Australians to help deal with the cost of living crisis.

While the headline inflation number came in slightly above market expectations, the fact core inflation is falling means the chances of the Reserve Bank of Australia (RBA) raising the cash rate for a 14th time in this interest rate cycle are almost negligible.

The RBA is now expected to start cutting rates later this year or early in 2025 from the current 12-year high of 4.35%.

The details

The Bureau of Statistics says the most significant price rises driving inflation to an annualised 3.5% in July were in the categories of Housing (+4.0%), Food and non-alcoholic beverages (+3.8%), Alcohol and tobacco (+7.2%) and Transport (+3.4%).

A notable exception were Electricity prices, which fell 5.1% in the 12 months to July, down from a 7.5% rise in June. 

The Bureau says the introduction of federal energy bill relief and state government rebates in Western Australia, Queensland, and Tasmania from July 2024 drove the fall. 

AMP Deputy Chief Economist Diana Mousina says market expectations of a slightly lower headline CPI figure may have been due to the uncertainty around “how much of the relief would be felt through the electricity rebates that were given by the states and the federal government.”

“That's what's playing, I think, into some of the differences in forecast views between what economists were looking for, which was a bit of a lower inflation rate of 3.4%.”

“It came in at 3.5%”, she says.

In all these schemes, rebates are provided to power companies to reduce customers' bills before they actually issue them.

This has the effect of reducing bills before they reach the customer, artificially lowering headline inflation.

However, the Reserve Bank—which has been fighting a lengthy battle to bring inflation down—has said it will “look past” these one-off headline measures and focus on core data.

The good news here is that the so-called “Trimmed mean”—the RBA’s preferred measure of inflation—fell to 3.8% annualised, down from 4.1% the previous month, while another core measure that excludes “volatile” items fell from 4% to 3.7%.

While this is still a long way from the RBA’s 2% - 3% inflation target band, which it has pledged to achieve by the end of next year, it does show inflation is trending down.

“From the Reserve Bank’s point of view, I think this is in line with their own forecasts and their own thinking - that they're probably pretty comfortable to keep rates where they are,” says AMP’s Diana Mousina.

Housing still driving inflation

The ABS says the rise in its Housing category was driven by an annual rise in new dwelling prices of 5.0%, down from 5.4% in June.  

This is “maintaining the trend of annual price growth of around 5% since August 2023”, according to the ABS.

“This reflects builders passing on higher costs for labour while prices for building materials remain high,” the official statistician says.

Rental prices also grew 6.9% in the 12 months to July 2024, but the ABS says that is down slightly on a 7.1% increase in June. 

“Rental price growth remains high due to a tight rental market reflected by low vacancy rates in most capital cities,” the ABS says.

When will rates come down?

While there’s considerable volatility in monthly inflation data, it’s clear there’s no case at all in these numbers for the RBA to raise rates any further.

And while Governor Michele Bullock recently ruled out cuts in the next six months, money market traders simply don’t believe her.

They think the RBA’s hand will be forced by rising unemployment, more people defaulting on mortgage loans and other central banks around the world cutting rates to stave off their economics falling into recession.

They’ve fully priced in one cut of 0.25% by December, two by April next year, and nearly four 0.25% cuts by September next year.

“So despite the Reserve Bank sounding quite hawkish, or talking about potentially the need for higher interest rates, a lot of the moves that we've seen from global markets like the US is really influencing Australia more than what the Reserve Bank is saying,” Diana Mousina says.

“The US is priced for four interest rate cuts before the end of this year, which is influencing Australia.” 

Still, Ms Mousina says AMP doesn’t think there will be a rate cut in Australia before Christmas. 

“We think that the Reserve Bank will start cutting rates early next year,” she says.