Inflation to ease as rate cuts remain a distant prospect

Inflation is expected to have eased further last month, economists predict, as motorists received relief at the petrol bowser and government power bill rebates began to take effect.

Fresh inflation figures, scheduled to be released on Wednesday, are expected to show headline CPI eased to 3.4 per cent in the year to July. Picture: Newswire / Gaye Gerard

An expected fall in the headline inflation rate last month is likely to be ignored by the Reserve Bank, economists say, as the ­impact of temporary energy subsidies does not reflect the true price pressures in the economy.

Economists predict official ­figures released on Wednesday will show headline inflation falling to 3.4 per cent in the year to July, down from 3.8 per cent in June, as motorists received relief at the petrol bowser and billions of dollars worth of power bill rebates began to take effect.

But underlying inflation, the RBA’s preferred measure of core price pressures, is anticipated to be running closer to 4 per cent, underlining the challenge governor Michele Bullock faces in bringing inflation back to the central bank’s 2 to 3 per cent target band.

“There’s going to be a gap ­between the headline rate of inflation and the underlying measures of inflation,” HSBC chief economist Paul Bloxham said. “That’s going to start showing up as soon as July.

“The reason why we have to really mind that gap is because the headline rate is not what is going to drive what the RBA does – what the RBA does is going to be based on the core measures of ­inflation.”

Even as underlying price pressures remain persistent, money markets are priced for a quarter percentage-point rate cut at the RBA’s final board meeting of the year in December, which would bring the cash rate to 4.1 per cent.

In an attempt to contain investors’ expectations, Ms Bullock has downplayed the chance of rate ­reductions, warning that while rate cuts before year’s end are not implausible, they remain unlikely.

Speaking ahead of Wednesday’s inflation figures, Jim Chalmers pointed to the government’s efforts to ease price pressures, which peaked at 8.4 per cent in December 2022 on the ABS monthly measure.

“Inflation is sticky and stubborn, but we’ve made a lot of progress since we came to office,” the Treasurer said.

But opposition Treasury spokesman Angus Taylor ­accused Dr Chalmers of “manipulating” the inflation figures via Labor’s cost-of-living measures that will result in a temporary reduction of the headline inflation rate.

“He’s fighting the Reserve Bank,” Mr Taylor declared.

Driving a deceleration in July’s headline inflation figure will be the impact of a $1000 lump sum electricity bill rebate in Queensland, as the Miles Labor government shovels out cost-of-living relief ahead of October’s state election, analysts expect.

“That’s going to be the biggest factor in the CPI tomorrow,” RBC Capital Markets chief economist Su-Lin Ong said.

“If it is getting skewed to the downside quite heavily from the electricity rebate, the Reserve Bank will look through that.”

While the Albanese government has similarly offered a $300 power bill rebate, which has been topped up by an additional $400 in Western Australia, support only flowed from July 31, thus limiting its impact on the month’s ­inflation reading.

Also helping to reduce the headline CPI reading was relief for motorists at the fuel pump as average retail petrol prices dropped almost 2 per cent to $1.90 a litre.

Some analysts argued that the lower headline result would ease robust growth in pay packets – which are frequently pegged to the inflation rate – and help cool prices in the labour-intensive services sector.