Inflation cools, prompting RBA cut in August

Headline and underlying inflation are back where they need to be for the Reserve Bank to make another interest rate cut at its August meeting.

RBA governor Michele Bullock. Picture: Gaye Gerard/NewsWire

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Jim Chalmers has shared the credit of “stunning” inflation numbers with Reserve Bank governor Michele Bullock after both headline and the all-important underlying inflation rate tightened in line with expectations, indicating another interest rate cut of 0.25 percentage points will be delivered in August.

The Treasurer could not commit to delivering the same improvements in Australia’s lacklustre productivity as has been seen with inflation, but said there “will be enough areas” where “common ground” could be found at his economic reform roundtable to improve living standards.

Australia’s headline inflation rate declined to 2.1 per cent in the year to June, down from 2.4 per cent, while the key underlying inflation rate – which strips out volatile prices and is watched closely by the RBA – eased to 2.7 per cent from 2.9 per cent.

While energy prices rose again despite major government subsidies, Dr Chalmers raced to claim credit for the “outstanding” overall numbers.

“Whether it’s the Reserve Bank or the government … we’ve been able to make this stunning progress on inflation together as a consequence of those shared ­objectives,” Dr Chalmers told reporters in Canberra.

Headline inflation at 2.1 per cent is now the lowest annual inflation rate since the March 2021 quarter.

“We know that by working with the Reserve Bank, with responsible budgeting and cost-of-living relief, we’ve been able to make this progress today,” the Treasurer said.

Ms Bullock will headline the first day of Dr Chalmers’ economic reform roundtable which he said had now received 800 submissions and would include a working group to follow up on the reform suggestions that achieve consensus.

While the RBA had forecast a lower annual underlying inflation rate of 2.6 per cent for the June quarter, most economists such as Westpac’s Justin Smirk said that “we don’t see as enough to prevent the RBA from cutting rates at its August meeting”.

Financial markets are now pricing in a full 0.25 percentage point rate cut to 3.6 per cent at the RBA’s August meeting.

An increase in electricity prices of 8.1 per cent contributed to a higher headline inflation number than the underlying measure, but that might rise further given it was the last quarter when Western Australia’s and Queensland’s electricity rebate roll-offs will have a material impact on electricity prices.

Dr Chalmers said “our cost of living help has played an important role in taking some of the sting out of prices … whether it’s the ­energy rebates we’ve provided in the most responsible way that we can”.

Oxford Economics’ head of macroeconomic forecasting Sean Langcake said that while the end of rebates would see headline inflation rebound it would not impinge on the RBA’s rate cut path.

“Headline inflation will spike next quarter when the impact of the first round of rebates washes through. But as ever, the RBA will be more focused on core inflation, which is on an encouraging trend,” Mr Langcake said.

RSM Australia economist Devika Shivadekar said she expected the RBA to move to an easing cycle in August, despite government rebates continuing to impact the headline inflation figures, while IFM Investors chief economist Alex Joiner said he also expected that the RBA would proceed with an August rate cut.

“We expect this is enough progress on inflation to allay concerns of the board that a near-term rebound is a material risk,” Dr Joiner said.

The RBA held interest rates unchanged at 3.85 per cent at its July meeting, surprising economists who expected a cut because of a decline in monthly inflation figures.

Ms Bullock said the decision to hold had been a matter of timing and the central bank wanted to see more evidence of inflation being comfortably back within the target range of 2 to 3 per cent.

“We don’t want to end up having to fight inflation again. We want to make sure we’ve nailed it,” Ms Bullock said.

“We’ve only had one quarter of underlying inflation just back in 2.9 per cent (in the three months to March).

“A lot of people focused on the headline CPI number at 2.1 per cent, but we don’t think inflation in a sustainable way is that low – we think it’s higher,” Ms Bullock said.

ANZ chief economist Richard Yetsenga said the decline in inflation had slowed, indicating that only modest interest rate cuts were ahead.

On Wednesday, ANZ-Roy Morgan Inflation Expectations for June showed the measure at 4.8 per cent – an increase of 0.20 percentage points from May and level with the average so far this year.