Australian consumer price inflation slowed to a three-year low in August, helped by government electricity rebates and lower petrol prices, while core inflation hit its lowest level since early 2022, a sign of slowing costs.
Market reaction was limited as the central bank had already said it would review the decline in headline inflation, which is not enough to justify rate cuts in the near term.
The Australian dollar pulled back from its highest level in a year and a half and was flat at $0.6890, while three-year bond futures were little changed at 96.64.
Swaps imply a 75% chance the Reserve Bank of Australia could start cutting rates in December after it held policy steady and did not discuss the option of raising rates on Tuesday.
Data from the Australian Bureau of Statistics showed on Wednesday that the monthly consumer price index (CPI) rose at an annual rate of 2.7% in August, down from 3.5% in July and in line with market expectations.
On a monthly basis, the CPI fell by 0.2% in August compared to July.
Electricity prices fell nearly 15% in August, while gasoline fell 3.1%. On an annual basis, electricity prices fell 17.9%, the largest annual decline since the early 1980s.
This is thanks to electricity subsidies provided by the federal and state governments, the ABS notes. Otherwise, they would have increased by 0.1% in August.
The RBA has kept rates unchanged since November, judging that the 4.35% bank rate – up from a record low of 0.1% during the pandemic – is restrictive enough to bring inflation back into its 2-3% target range while preserving employment gains.
However, core inflation – which stood at 3.9% in the last quarter – has declined very little over the past year, leaving policymakers unconvinced that inflation is moving closer to the target range.
Indeed, a closely watched measure of core inflation, the adjusted average, has slowed to 3.4% annually from 3.8%, leaving it above the 2% to 3% target range and a headwind to interest rate cutting.
The monthly report also provided the first update on many services for the quarter, which showed that services inflation stood at 4.2% in August compared with a year earlier, slowing only slightly from 4.4% in July.
“The adjusted average has also fallen, but not as much as headline inflation, suggesting a dominant fuel component in the headline rate,” said Dwyfor Evans, head of Asia Pacific macro strategy at State Street Global Markets.
“The RBA remains cautious about inflation trends for now, and monetary policy will not be limited to this month of abnormal price data.
