Key Points
- The latest CPI figures shows inflation has dropped by 1 per cent.
- The Reserve Bank meets next week to consider interest rates.
- Interest rate rises have been used by the Reserve Bank as a way to slow inflation.
The latest inflation figures have come as somewhat of a surprise to economists who had expected inflation to have slowed a little, but not by quite as much as it has.
With the Reserve Bank of Australia (RBA) set to hold its monthly meeting for August next week, mortgage holders may be hoping the figures showing annual inflation dropping by 1 per cent will be enough for rates to be kept on hold.
What the CPI data showed
According to the Consumer Price Index (CPI) for the June quarter, inflation dropped from 7 per cent to 6 per cent for the past year.
Quarterly inflation has decreased across the first half of 2023. Source: SBS News
On a quarterly basis, CPI, which measures household inflation based on price changes across a number of areas of household expenditure, rose by 0.8 per cent.
This means that while everyday expenses such as rent and food continue to increase, the rate at which they are increasing is slowing.
The factors being considered by the RBA
The RBA has carried out a series of rate rises since April 2022 when rates were at a low of 0.1 per cent to its current 4.1 per cent.
The bank has said such measures are needed to bring record inflation down.
Inflation had reached a 32-year high in the December 2022 quarter when it rose to 7.8 per cent for the year.
Prices rose 1.4 per cent over the first quarter of 2023, which equated to 7 per cent for the year to March.
Market analyst Tony Sycamore. Source: Supplied / Suwirto Ari
“We know that they were looking at the data from the ABS to determine what they're going to do in August, the fact that the number has come in below their own forecasts and below market consensus would indicate they have time now to sit on their hands to assess more data as it comes in in subsequent months,” he said.
“They said at the August meeting the board would have the benefit of additional data on inflation, the global economy, the labour market and household spending.”
Sycamore said when mentioning household spending, the RBA was referring to retail sales data which is due to be released on Friday.
He said the RBA would be hoping for a slowdown in retail spending.
Sycamore said while the global economy was “muddling along”, Australia’s strong labour market continued to hold strong.
“That's probably the one outlier, there is obviously a very strong labour number, that's probably the one bit which will create a little bit of confusion out there because we do know that the RBA is concerned about tightness in the labour market,” he said.
“So in terms of the four boxes that they've put out there for the market to assess, three of them would suggest that the RBA stay on hold, while the fourth one being that hot labour market data would probably be more indicative that the RBA could hike rates when they meet next week.
The chances of an interest rate rise
Sycamore said prior to the release of the CPI figures a rate rise in August was seen as a possibility.
“The markets were sitting at about 44 per cent [chance of a rate rise] prior to the number being released this morning. And we're now sitting at about 11 per cent,” he said.
“The markets really slashed the odds of another rate rise for August.”
Sycamore said one of the factors that finance analysts considered was the rate of core inflation.
Also known as the 'trimmed mean,' he said core inflation took away volatile components such as energy and fuel prices from the equation to provide "a clear read of what inflation is actually doing in the economy."
He said the fact this figure had actually come in at 5.9 per cent, below the 6.25 per cent the RBA had forecast, meant it could "afford to stay on pause in August and possibly beyond."
Sycamore said it was now likely the RBA would keep rates on hold at 4.1 per cent.
Australia's inflation rate target
The RBA is targeting an inflation rate of between 2-3 per cent.
Deloitte Access Economics partner Stephen Smith said, "One of the challenges for the RBA is that interest rates only work over time and they work with a bit of a lag.
"If you increase interest rates today, that would still take time to have an effect and could slow the economy even 12 to 18 months after the decision," he said.
"The RBA have increased interest rates significantly and the full impact hasn't hasn't yet been felt.
"We won't know whether the RBA has overdone it, if you like, for several months yet, and at that point they may well need to adjust interest rates again to to ensure that inflation and the economy remains on a stable path."
What else do the CPI figures tell us?
The June quarter CPI figures showed the lowest quarterly rise since September 2021.
The biggest contributors to the rise were rents, which recorded the strongest quarterly increase since 1988, as well as international holiday travel and accommodation, other financial services, and new dwellings bought by owner-occupiers.
The monthly inflation gauge, which was released at the same time, rose 5.4 per cent in the 12 months to June.
