Australian inflation cools, RBA likely to maintain aggressive course

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(Bloomberg) — An Australian inflation indicator cooled in July, suggesting that price pressures have eased in the current quarter but not quickly enough to justify premature rate cuts.

The consumer price indicator rose 3.5 percent from a year earlier, down 3.8 percent from a year earlier and just above economists' estimates, according to government data released on Wednesday. The adjusted core index, which smooths out volatile items, rose 3.8 percent from 4.1 percent a month earlier. The result was due to slowing price growth in clothing and footwear, electricity and fuel.

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With the data unlikely to dissuade the Reserve Bank from its hawkish stance, the yield on policy-sensitive three-year notes rose to 3.54%, while the local currency gained as much as 0.3%, erasing its annual loss against the greenback. Money markets are still banking on a rate cut in December.

“It looks like markets are more excited by the slight rise in the benchmark index than by an acceptance of the fact that the underlying trend appears to be improving,” said Robert Carnell, head of Asia-Pacific research at ING Groep NV. “We are encouraged by these latest data as they make a cut in the first quarter of 2025 seem less speculative, in our view.”

The data comes after RBA Governor Michele Bullock said earlier this month she did not expect any rate cuts this year and even warned that further tightening of monetary policy may still be needed. The rate-setting council left the benchmark interest rate at a 12-year high of 4.35% three weeks ago and said it remained vigilant against upside risks to inflation.

The RBA's aim is to bring consumer prices back into the target range of 2-3%.

“Inflation is still tough and stubborn in our economy, but it is coming down,” Finance Minister Jim Chalmers told reporters after the release. “Our cost of living policy is helping.”

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RBA policymakers are likely to approach Wednesday's data with caution as it covers only a portion of the overall CPI basket. In addition, the July report focuses on goods rather than services, where price pressures are more persistent.

The slowdown in July was largely due to federal and state energy subsidies for households, which led to a 6.4 percent decline that month, according to the data.

“Without the rebates, electricity prices would have risen by 0.9 percent,” said Leigh Merrington, acting head of price statistics at the ABS, in a statement.

What Bloomberg Economics says…

“Disinflation is back underway in Australia as lower fuel prices and cost of living subsidies push down price increases. While this is welcome, more evidence is needed to convince the RBA that it is time to cut interest rates.”

— James McIntyre, economist

— Click here to view the full note

The RBA has kept rates on hold this year, but stressed that aggregate demand still exceeds the economy's supply capacity. Bullock has expressed a willingness to be patient as she seeks to curb inflation without choking economic growth. The bank's forecasts suggest core CPI will not return to target until late 2025.

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“Today's decline in inflation was widely expected and, taken in isolation, is unlikely to be enough to dissuade the RBA from its hawkish stance at its board meeting next month,” said Tony Sycamore, analyst at IG Markets.

The CPI report showed:

• The largest contributions to the annual increase were housing with an increase of 4%, food and non-alcoholic beverages with an increase of 3.8% and alcohol and tobacco with an increase of 7.2%.
• Rents rose 6.9% in the period to July, compared with a rise of 7.1% in the 12 months to June, reflecting continued tightness in the rental market in capital cities.
• Higher prices for strawberries, grapes, broccoli and cucumbers pushed fruit and vegetable prices to their biggest annual increase since December 2022

— With assistance from Shinjini Datta and Matthew Burgess.

(Updates Bloomberg Economics, Markets, adds analyst comment.)

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