Drop in inflation announced just a day after interest rates stay on hold

The rate of inflation has fallen to its lowest levels since August 2021, the Australian Bureau of Statistics revealed today. The news comes just a day after the Reserve Bank of Australia announced it would be keeping interest rates on hold at 4.35 percent.

The drop in the rate of inflation to 2.7 percent has been largely attributed to moderating prices of petrol and diesel, with automotive fuel 7.6 percent lower than a year ago, and electricity, which fell 17.9 percent over the same period. 

Michelle Marquardt, head of Prices Statistics at Australian Bureau of Statistics, said the decrease in electricity prices was largely due to Commonwealth and State Government energy rebates in Queensland, Western Australia and Tasmania.

“Electricity fell 17.9 percent in the 12 months to August, which is the largest annual fall since the electricity series started in the early 1980s,” Ms Marquardt said. “Commonwealth Government and State Government rebates led to a 14.6 percent fall in electricity prices in the month of August, which followed a 6.4 percent fall in July. 

“Excluding the rebates, electricity prices would have risen 0.1 percent in August and 0.9 per cent in July.”

The news was less positive for renters and those seeking to build or renovate, with rents up 6.8 percent over the past year and new dwelling prices also up by 5.1 percent.

Following a meeting of the RBA board yesterday, governor Michele Bullock announced that the cash rate would remain unchanged, citing persistently high inflation and economic uncertainties as major influences on the decision.

“Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance,” Ms Bullock said in a statement. “But inflation is still some way above the midpoint of the 2–3 per cent target range. 

“Headline inflation is expected to fall further temporarily, as a result of federal and state cost of living relief. However, our current forecasts do not see inflation returning sustainably to target until 2026. In year-ended terms, underlying inflation has been above the midpoint of the target for 11 consecutive quarters and has fallen very little over the past year.”

While the decision to keep rates on hold was widely anticipated, it has raised eyebrows in some quarters given the US Federal Reserve announced last week it was dropping the official cash rate by 50 basis points. However, research director at CoreLogic Asia Pacific, Tim Lawless, says there was good reason for keeping rates on hold in Australia for now.

“Importantly, Australia hasn’t gone ‘as hard’ on monetary policy as most other Western nations, increasing the cash rate by 425 basis points compared with a 525 basis point increase in the US and NZ, and a 515 basis point rise in the UK,” he said. 

“Also, our tightening cycle has lagged most other nations, with the cash rate increasing from May 2022 compared with the US where the hiking cycle commenced in March 2022 or the UK where interest rates started rising in December 2021, or NZ and the EU which commenced rate hikes even earlier, in October and July 2021 respectively.”

Ms Bullock said the RBA board would be keeping a close on labour markets both here and overseas as it navigates a path to sustained lower inflation at the target rate of between 2 and 3 percent.

“Sustainably returning inflation to target within a reasonable timeframe remains the board’s highest priority,” she said. “This is consistent with the RBA’s mandate for price stability and full employment. To date, longer term inflation expectations have been consistent with the inflation target and it is important that this remain the case.

“While headline inflation will decline for a time, underlying inflation is more indicative of inflation momentum, and it remains too high.”