Core inflation falls in pivotal CPI release
Decelerating trimmed mean annual inflation suggests that interest rates have already risen enough
Australian mortgage holders and businesses can breathe a sigh of relief with the release of today’s highly-anticipated June quarter Consumer Price Index (CPI) showing inflation in line with expectations. The data has revealed a headline inflation rate of 1.0% for the June quarter, unchanged from the 1.0% increase in the March quarter. This takes annual headline inflation in the year to June to 3.8%, marginally increasing from 3.6% in the year to March. That outcome was in line with market expectations.
Importantly, however, trimmed mean CPI – the Reserve Bank’s preferred measure of core inflation – slowed to 3.9% over the year to June, down from 4.0% in the March quarter, following a 0.8% increase in the June quarter. The deceleration to 3.9% is the sixth consecutive quarterly decline in the rate of core inflation, which is now at the lowest rate in two years (Chart 1).
Chart 1: Trimmed mean consumer price inflation
Source: ABS Consumer Price Index
Annual inflation in the labour-intensive services sector increased by 4.5% in June, up from 4.3% in March, as consumers continued to experience higher prices for everyday services. The cost of visiting a vet increased by 6.7% over the year, the price of a restaurant meal increased by 4.1%, and the cost of a haircut increased by 5.6%.
One of the largest contributors to the overall price increase over the past year was housing, as tight rental markets continued to drive growth in rental costs. Although price growth in rents edged lower to 7.3% in the year off the back of changes to the Commonwealth Rent Assistance in March and September, it remained close to its fastest rate since 2009, as a lack of home building and strong demand drove rental vacancy rates to record lows.
Annual food inflation decelerated to 3.3% in the June quarter, down from 3.8% in March. Prices fell across most food categories except for fruits and vegetables, for which price growth was particularly strong due to bad weather and growing conditions.
Today’s figures show that much of the significant price rises in goods and services over the quarter have been driven by supply-side factors, including poor weather and housing shortages, which are unaffected by interest rate rises.
Higher rates only fight inflation on the demand side, by subduing spending. Australia’s economy is already weak with investment and consumption in the economy too low, and with business insolvencies escalating. One thing is clear: the Australian economy is not overheating.
Given the Reserve Bank’s penchant for data dependent decisions, the steady June quarter trimmed mean inflation result is likely to provide reassurance that current rates are sufficient to return price growth back within the target band over the medium term. As such, Deloitte Access Economics does not expect the Reserve Bank to hike rates in August.
This newsletter was distributed on 31st July 2024. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Reid Quekett, Economist at Deloitte Access Economics
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