Australian Inflation Eases in July Due to Rebates, but Broader Price Pressures Persist

Australia's inflation rate eased to a four-month low in July, driven by government rebates on electricity bills. However, the lack of broader price progress disappointed markets, reducing the likelihood of an imminent interest rate cut from the Reserve Bank of Australia.

Australian Inflation Dips with Electricity Rebates, But Market Hopes for Rate Cuts Dim as Prices Persist

Government rebates on electricity bills resulted in a four-month low in Australian inflation in July. However, markets were disappointed by the need for more progress in reducing price increases elsewhere, which reduced the likelihood of a near-term interest rate cut.

On August 28, the Australian Bureau of Statistics reported that the consumer price index (CPI) increased at an annual rate of 3.5% in July, a decrease from the 3.8% increase observed in June.

Markets slightly increased the probability of a first easing from the Reserve Bank of Australia in November to 48.4%, from 58%, as the figure was slightly above forecasts of 3.4%.

The three-year bond yield increased by four ticks to 3.559%, while the Australian dollar rose 0.1% to $0.6803, the year's highest level.

The CPI remained unchanged from June to July, as electricity prices decreased by 6.4% and fuels by 2.6%. However, rent, food, and gas prices increased, per Reuters.

"July's inflation print is full of smoke and mirrors. At face value, the fight against inflation looks to have taken a massive step forward...but some of that improvement came from rebates that artificially lowered the cost of electricity," said Harry Murphy Cruise, an economist at Moody's Analytics.

"While that makes the headline inflation figure look a whole lot better, prices are ultimately unchanged."

The statistics agency stated that the decrease in headline inflation was due to electricity subsidies from the federal and state governments. These subsidies were initiated in Queensland and Western Australia last month and are expected to be extended to other states and territories starting in August.

It predicted that electricity prices would have increased by 0.9% in July, excluding rebates.

RBA Holds Off on Rate Cuts as Inflation Shows Limited Progress Despite Aggressive Interest Hikes

The Reserve Bank of Australia (RBA) has increased interest rates by 425 basis points to 4.35% since May 2022 to mitigate inflation. Nevertheless, policymakers have ruled out a near-term rate reduction due to the gradual decline in underlying inflation, which is anticipated to return to the target band by the end of 2025.

The July report is disproportionately skewed toward goods in the quarter's first month. The trimmed mean, a closely monitored indicator of core inflation, decreased from 4.1% in June to 3.8% annually.

The CPI excluding volatile commodities and holiday travel decreased to 3.7%, the lowest reading since early 2022, compared to the previous reading of 4.0%.

According to Tapas Strickland, the National Australia Bank's director of market economics, the July report indicates little additional progress in goods disinflation.

"Unfortunately, there is no real read on the services side of the economy out of today's print, so it doesn't give you a comprehensive read, but at least on the goods side of the economy it suggests you're not making much progress."

Inflation in products was stagnant during the month.

Markets are still entirely pricing in a rate cut this year, partly because the Federal Reserve is almost sure to begin easing policy next month, and additional cuts are anticipated in Canada, Europe, and New Zealand.

Furthermore, the Australian dollar's upward trajectory, which is currently approaching its highest level of the year, should help reduce imported inflation.