Australian Inflation Trends in July
In July, Australia experienced a slowdown in inflation, reaching a four-month low, largely attributed to government rebates on electricity bills. According to the Australian Bureau of Statistics, the Consumer Price Index (CPI) grew at an annual rate of 3.5%, down from June's 3.8%. This figure slightly exceeded the anticipated 3.4%, influencing financial markets to slightly adjust the probability of a near-term interest rate cut by the Reserve Bank of Australia (RBA) to 48.4% from a previous 58%.
Market Reactions to Inflation Data
The announcement had immediate effects on financial markets. The Australian dollar appreciated by 0.1%, reaching $0.6803, one of its highest values this year. Additionally, the three-year bond yield increased by four basis points, rising to 3.559%. On a monthly basis, the CPI held steady from June, with electricity prices falling by 6.4% and petrol by 2.6%, contrasting with increases in rents, food, and gas prices.
Analysis by Economists
Harry Murphy Cruise, an economist at Moody's Analytics, described July's inflation report as "full of smoke and mirrors." While at first glance the inflation battle seems to have progressed, a portion of this improvement stems from rebates that artificially reduced electricity costs. This makes the headline inflation figure appear more favorable, but actual price levels remain largely unchanged.
Impact of Government Subsidies
The apparent decrease in headline inflation primarily resulted from electricity subsidies provided by federal and state governments. These rebates, which started in Queensland and Western Australia in July, are set to extend to other regions in August. Without these rebates, electricity prices would have risen by an estimated 0.9% last month.
Interest Rate Policies
Since May 2022, the RBA has increased interest rates by 425 basis points, reaching 4.35%, in efforts to curb inflation. However, due to the slow reduction in underlying inflation, which is projected to return to the target range by the end of 2025, policymakers have dismissed the likelihood of a near-term rate cut.
Core Inflation Indicators
July's report highlighted that a key measure of core inflation, the trimmed mean, declined to an annual rate of 3.8% from June's 4.1%. The CPI, excluding fluctuating items and holiday travel, fell to 3.7%, marking the lowest level since early 2022, compared to the previous 4.0%.
Future Rate Cut Expectations
Despite the current statistics, markets continue to fully expect a rate cut this year, considering the Federal Reserve's potential policy easing next month and anticipated cuts in Canada, Europe, and New Zealand. An appreciating Australian dollar, near its highest value this year, may also contribute to reducing imported inflation.
