Falling Inflation Signals Possible Interest Rate Pause

Falling Inflation Signals Possible Interest Rate Pause
A woman pays a fruit vendor in a market in Melbourne, Australia, on July 23, 2013. Scott Barbour/Getty Images
Alfred Bui
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Australia’s inflation dropped further in July as the price growth of many consumer products stabilised, prompting economists to expect the Reserve Bank to pause its interest rate hiking cycle again in September.

Data from the Australian Bureau of Statistics (ABS) showed that the monthly consumer price index (CPI) grew by 4.9 percent in the year to July, down from 5.4 percent in June.

The figure was lower than market expectations of a 5.2 percent increase and well below the peak of 8.4 percent in December 2022.

However, ABS head of prices statistics Michelle Marquardt said the drop in CPI was less significant if excluding volatile price movements in automotive fuel, fruit and vegetables, and holiday travel.

“When excluding these volatile items, the decline in annual inflation is more modest at 5.8 percent in July, compared to 6.1 percent in June,” she said.

While Treasurer Jim Chalmers welcomed the July results, he remained cautious about the ongoing impact of inflation on Australian households.

“This is an encouraging result but we know Australians are still under the pump,” he said in a statement.

“It’s pleasing to see inflation is moderating but we know it will remain higher than we’d like for longer than we’d like.”

Mr. Chalmers also noted that the federal government was focusing on rolling out billions of dollars in support payments to alleviate the living cost pressure for people without adding to inflation.

Price Movements of Major Consumer Products

Housing prices were the largest contributor to July’s CPI, with a growth rate of 7.3 percent, followed by food and non-alcoholic beverages (up 5.6 percent).

However, the growth in CPI was partly offset by price falls in automotive fuel (down 7.6 percent) and fruit and vegetables (down 5.4 percent).

Within the housing category, the annual increase in dwelling prices fell from 6.6 percent to 5.9 percent in the month while rents climbed from 7.3 percent to 7.6 percent.

Meanwhile, electricity prices jumped by 15.7 percent over the past 12 months, partly due to annual price reviews by energy market regulators across all capital cities in July.

People shop for fruit and vegetables at a market in Melbourne, Australia, on June 11, 2021. (William West/AFP via Getty Images)
People shop for fruit and vegetables at a market in Melbourne, Australia, on June 11, 2021. William West/AFP via Getty Images

However, the ABS said the rebates from the Energy Bill Relief Fund introduced by the federal government as part of its $14.6 billion cost of living package had helped lower electricity price growth nationwide.

“If we exclude the impact of rebates from the July 2023 figures, electricity prices would have recorded a monthly increase of 19.2 percent,” Ms. Marquardt said.

Food and non-alcoholic beverages reported a more modest price increase at 5.6 percent, down from seven percent in the previous month.

“Food inflation continues to ease across most categories, while fruit and vegetable prices fell 5.4 percent compared to 12 months ago due to favourable growing conditions leading to increased supply,” Ms Marquardt said.

Although the drop in inflation in July is good news for Australian consumers, it is worth noting that the monthly CPI is more volatile than the quarterly version and does not reflect all price movements due to the unavailability of some price data.

Potential Impact on Reserve Bank’s September Interest Rate Decision

As inflation continues to trend down, many economists have predicted that the Australian economy is likely to avoid an interest rate increase in September.

Sally Tindall, the research director at the financial comparison website RateCity, warned borrowers to stay on their guard despite the prospect of another hold on interest rate hikes.

The central bank kept the official cash rate unchanged at 4.1 percent in July and August due to significant decreases in inflation in these two months.

It also wanted to observe how the impact of the previous 12 consecutive rate hikes unfolded in the economy.

“Governor [Philip] Lowe’s last meeting [in September] is unlikely to include any nasty surprises,” Ms. Tindall said.

“Inflation is now coming down nicely. At an annual rate of 4.9 percent, it’s still too high, but the data is tracking in the right direction.

“While there’s a chance we’re already at the peak, it’s impossible to rule out further hikes altogether.

Meanwhile, Westpac bank economists believed there was no near-term pressure for the Reserve Bank of Australia to lift interest rates again due to the weakening of price growth in July.
Alfred Bui
Alfred Bui
Author
Alfred Bui is an Australian reporter based in Melbourne and focuses on local and business news. He is a former small business owner and has two master’s degrees in business and business law. Contact him at [email protected].
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