How falling inflation could unlock an August rate cut
The cost of many everyday goods and services has continued to rise, but at a slower pace than Australians have been accustomed to in recent years.
Headline inflation rose 0.7% in the June quarter and 2.1% annually, according to the latest Consumer Price Index released by the Australian Bureau of Statistics (ABS) this morning.
"Annual inflation to the June 2025 quarter of 2.1% was down from 2.4% to the March quarter. This is the lowest annual inflation rate since the March 2021 quarter," says Michelle Marquardt, head of prices statistics at the ABS.
Meanwhile, the rate of underlying inflation - which excludes more volatile items - came in at 0.6% for the quarter and 2.7% annually.
Drilling down, the ABS notes that a sharp drop in the price of automotive fuel (down 10%) over the past year was the main contributor to the decline in annual inflation.
Price rises for rental properties, insurance and new dwellings also slowed over the 12 months, though Marquardt says that food prices remained relatively high.
"Food inflation stayed elevated due to higher prices for fruit and vegetables, up 4.6% compared to 12 months ago.
"Other notable price rises over the past 12 months were for eggs, up 19.1% as supply has been affected by bird flu outbreaks. Coffee, tea and cocoa prices rose 9.4%, with lower supply from major overseas coffee bean growing areas."
ABS to move to full monthly CPI
This morning's release wasn't the only major recent CPI update provided by the ABS. Last week the Bureau announced that it will begin rolling out a full monthly CPI publication from November.
Since 2022 the ABS had provided a partial monthly CPI update containing limited parts of the basket of goods and services it tracks. However, its intention has been to move to a complete monthly CPI update.
"The transition to a complete, internationally comparable monthly CPI as Australia's primary measure of headline inflation will provide better information for monetary and fiscal policy decisions that have a direct impact on all Australians," says the Australian statistician, Dr David Gruen.
The move has been welcomed by Reserve Bank governor Michele Bullock, among others, who expressed her enthusiasm for the prospect of getting access to more timely data in an address last week.
"It'll be great. I've made a number of points in the past that it's very difficult to interpret momentum in inflation when you only have four readings in a year. This is going to be much more helpful for us."
What does the latest inflation data mean for interest rates?
Still on the central bank, the Reserve Bank Monetary Policy Board surprised many when it held the cash rate steady at 3.85%, rather than reducing it, at its July meeting.
The decision to hold rates was not unanimous though, with six Board members voting to hold compared with three who were in favour of a cut.
Speaking after the last Board meeting, Bullock noted that the difference in perspective was more about timing than direction - a suggestion that has been interpreted by many as being a nod to further cuts.
So, could a cash rate cut be on the cards on August 12 when the Board announces it next monetary policy decision?
"After surprising the market by holding the cash rate at the July meeting, this release is likely to give the RBA confidence that CPI is returning sustainably to target," says Darryl Bruce, executive director for capital markets at Income Asset Management.
"As such, I expect that the RBA will resume cutting the cash rate at its August meeting with potentially a further cut later in the year if the trends in CPI and the labour market continue to ease."
Krishna Bhimavarapu, APAC economist at State Street Investment Management, is also of the opinion that the Board is likely to reduce the cash rate in a fortnight.
"Today's Q2 CPI data indicates a 25-basis-point cut is likely by the RBA in August.
"While the low headline number is undoubtedly driven by energy rebates, the trimmed mean is cooling gradually and offers confidence in the face of weak conviction on inflation."
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