Australia’s Inflation Hits 3-Year Low in August, Core Inflation Also Declines – Reuters

By Stella Qiu

SYDNEY – Australian consumer price inflation has decreased to a three-year low in August, largely due to government rebates on electricity, while core inflation also reached its lowest level since early 2022, signaling potential progress that could lead to interest rate cuts.

Following the data release, market responses were cautious as the central bank had indicated it would not adjust rates based on this temporary decline in headline inflation. The Australian dollar eased from its recent 1.5-year high, stabilizing at $0.6891, while three-year bond futures remained little changed at 96.63.

Market swaps suggest a 75% likelihood that the Reserve Bank of Australia (RBA) may begin lowering interest rates in December, especially after it maintained current policy without discussing a possible rate hike earlier this week.

According to the Australian Bureau of Statistics, the consumer price index (CPI) rose at an annual rate of 2.7% in August, down from 3.5% in July and aligning with market expectations. This decline has been attributed to federal and state government electricity subsidies, which significantly reduced prices by nearly 15% in August. Without these subsidies, prices would have risen by 0.1%. Additionally, petrol prices dropped by 3.1% during the month.

When factoring out volatile items and holiday travel costs, the CPI fell to 3%, at the upper end of the RBA’s target range of 2-3%, a decrease from July’s 3.7%. A closely monitored core inflation measure, known as the trimmed mean, declined to an annual rate of 3.4%, down from 3.8% in July. The RBA anticipates it will stabilize at around 3.5% by year-end.

"What really matters – as emphasized by the RBA – is achieving a sustainable return to underlying inflation within the target range. While we are not there yet, August’s results indicate progress," said Harry Murphy Cruise, an economist at Moody’s Analytics. He noted that while they expect rate cuts may not occur until February, the likelihood of a delay beyond that timeframe is decreasing.

The RBA has kept interest rates unchanged since November, determining that the current cash rate of 4.35% – increased from a record low of 0.1% during the pandemic – is sufficient to guide inflation back to the desired range while supporting job growth. However, underlying inflation, measured at 3.9% in the previous quarter, has shown minimal decline over the past year, leading to uncertainty among policymakers regarding inflation’s trajectory.

Treasurer Jim Chalmers remarked on the inflation figures as "heartening" and "encouraging," noting the favorable trends seen in the underlying inflation metrics. However, he cautioned against being overly optimistic, acknowledging the volatility of monthly statistics and the non-linear nature of inflation trends.

The monthly report also delivered initial insights into services inflation, which stood at 4.2% in August compared to a year ago, showing only a slight decrease from July’s 4.4%. Analyst Tony Sycamore from IG suggested that if these trends in underlying inflation appear in the crucial third-quarter inflation data, the RBA could pivot toward a more dovish stance at its upcoming meeting on November 5th, potentially leading to a 25 basis point rate cut in December.