By Shane Wright and Millie Muroi
A nationwide slowdown in inflation, the ongoing threat of Donald Trump’s tariffs and an economy showing signs of wear and tear give the Reserve Bank no option but to cut official interest rates when it meets next month.
Wednesday’s quarterly inflation figures show that almost everywhere the RBA may look, price pressures are disappearing faster than a shadow on a rainy afternoon.
Reserve Bank governor Michele Bullock will be under pressure to cut interest rates after the release of June quarter inflation figures on Wednesday morning.Credit: Bloomberg
The Australian Bureau of Statistics reported that headline inflation was 0.7 per cent in the June quarter, taking the annual rate down to 2.1 per cent. It had been 2.4 per cent in the March quarter and is the lowest inflation rate since early 2021.
Given the way the federal governments (and most states) have sought to take some of the edge off high electricity prices, the Reserve has focused more intently on underlying measures of inflation.
According to the bureau, underlying inflation lifted by 0.6 per cent in the quarter, taking the annual rate down to a near four-year low of 2.7 per cent.
In announcing a surprise decision not to cut rates earlier this month, Reserve Bank governor Michele Bullock noted that these quarterly inflation numbers would be a key factor in determining when home buyers would enjoy further interest rate relief.
On a 6-3 vote, the bank held rates steady, waiting for these numbers.
Those (unknown) six members of the Reserve Bank’s monetary policy committee who voted to hold interest rates steady now have nowhere to go.
The three who backed a cut have been vindicated. According to the minutes of the July meeting, those supporting a cut argued there was “already sufficient evidence to be confident that inflation was on track to be sustainably back at the midpoint of the target range, if not lower”.
The quarterly numbers support that analysis.
About 55 per cent of all goods and services tracked by the bureau are experiencing price increases of less than 2 per cent.
Outside of the pandemic, the last time such a large proportion of the CPI basket was experiencing such low inflation was in 2019. At that time, the Reserve Bank was rapidly cutting interest rates – to just 0.75 per cent – because inflation remained anchored below its 2-3 per cent target band.
Underlying inflation came perilously close to showing a 0.5 per cent increase over the quarter when you drill the numbers down to two decimal points.
In Sydney and Melbourne, which account for almost half of the nation’s consumers, inflation is running at 1.9 per cent and 2 per cent respectively.
The monthly inflation report covering June, which was also released on Wednesday, showed inflation slipped to 1.9 per cent.
A key source of inflation has been the housing construction sector. While prices in this area rose by 0.4 per cent in the quarter, annual inflation slipped to just 0.7 per cent. It had peaked at 20.7 per cent in the September quarter of 2022.
Rents climbed by 4.5 per cent over the past 12 months. A year ago, they were lifting by 7.3 per cent. Insurance costs are rapidly easing. In March last year, insurance inflation was running at 16.4 per cent but it now down to 3.9 per cent.
The bank has also been concerned that services inflation would be fed by a wage-price spiral. The spiral never eventuated, wage growth is slowing and now services inflation is back to where it was when the economy was emerging from the pandemic.
If it wasn’t for expensive strawberries and blueberries, the end of government power subsidies and the annual increase in private health insurance, the quarterly inflation result would have been alarmingly low.
Treasurer Jim Chalmers was, understandably, chuffed with the numbers which he described as “outstanding”. When in parliament Opposition Leader Sussan Ley turned her attention to soaring egg prices, which have climbed 19 per cent over the past year due to avian flu-related culling of the nation’s hens, Chalmers clucked with barely restrained joy.
“When we came to office, food inflation was running at 5.9 per cent and now it is about half of that at 3 per cent,” he said.
“If [Ley] is unhappy about food inflation, she must be absolutely livid at the underperformance of her own government, the government she was a cabinet minister in. Because when we came to office, inflation had a six in front of it and it was absolutely galloping.”
ACTU secretary Sally McManus said the numbers showed the Reserve Bank had erred in not cutting rates.
“Last month the RBA failed to do their bit to provide much needed support to working Australians, but there are no more excuses not to cut rates when the bank next meets two weeks from now.”
Unions and financial markets are rarely in agreement, but on what the Reserve will do at its August 11-12 meeting they are on a unity ticket.
Markets, burned by the July meeting result, reckon there’s a better chance of Trump admitting his tariffs will hurt American consumers than of the bank holding rates steady in a fortnight’s time.
Westpac’s chief economist Luci Ellis said the figures would have come as a relief to the RBA, especially after the most recent jobs figures showed unemployment increasing.
Ellis, who used to sit in on RBA meetings, believes the six committee members who voted to hold will fall into line with the three who backed a cut, delivering unanimous support to bring the cash rate down a quarter percentage point.
“If we are correct that the RBA does cut in August, the path from there also looks increasingly likely to line up with our current forecast of cuts in November, then February and May 2026. Assuming our expectations are borne out, that would take the cash rate to a trough of 2.85 per cent,” she said.
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