Inflation eases, but cash rate outlook up in the air

Australia's inflation rate has continued to fall, with figures released this morning revealing that the annual rate of inflation is the lowest it's been in over a year.

In the 12 months to June the Consumer Price Index (CPI) rose by 6% which, while far higher than the norm in recent decades, is a decline on the figures recorded by the Australian Bureau of Statistics (ABS) in the March 2023 (7%) and December 2022 (7.8%) quarters.

"CPI inflation slowed in the June quarter, with the quarterly rise being the lowest since September 2021," says Michelle Marquardt, the ABS's head of price statistics.

"While prices continued to rise for most goods and services, there were some offsetting price falls this quarter including for domestic holiday travel and accommodation and automotive fuel."

The price of rent (up 2.5%), financial services (up 2.5%) and international travel and accommodation (up 6.2%) were among the leading contributors to inflation this quarter, with Marquardt noting that the former has reached decade-high levels of growth.

"Rents recorded the strongest quarterly rise since 1988, reflecting low vacancy rates amid a tight rental market. Rental price growth for flats continued to outpace the growth for houses."

While growth in the price of goods has broadly been trending down, services have continued to track in the opposite direction - an area which the Reserve Bank Board has called out as a cause of concern in recent monetary policy meetings.

The annual rate of services inflation rose to 6.3% in the June quarter, which is the highest it's been since June 2001.

"This is the first time since September 2021 that services inflation has been higher than goods, highlighting the change from 12 months ago when goods like new dwellings and automotive fuel were driving inflation," Marquardt says.

"Now price increases for a range of services like rents, restaurant meals, child-care and insurance are keeping inflation high."

What will this mean for interest rates?

Now that the CPI for the June quarter is in, attention will turn towards the Reserve Bank Board's monetary policy meeting next Tuesday.

Last month the RBA held the cash rate at 4.10%, though meeting minutes suggest that the decision was tight with both a pause and a 25 basis point hike considered. The central bank also confirmed that further action could still be an option depending on the state of the economy and inflation.

So with inflation falling is the RBA likely to hold fire again, or could a thirteenth rate hike since May 2022 still be on the cards?

As has been the case in the lead up to most of the Reserve Bank Board's monetary policy meetings in recent months, forecasts are once again mixed - at least, from the major banks.

Before today's CPI release ANZ were anticipating the RBA to hold rates again in August. In fact, while the bank acknowledged that another increase was possible, it was expecting the cash rate to remain at 4.10% for an extended period.

On the other hand, prior to the CPI release the Commonwealth Bank, NAB and Westpac were all expecting a 25bp hike from the RBA next week. Beyond August, the Commonwealth Bank didn't see any further rate increases ahead, while both NAB and Westpac were penciling in another hike in September.

Of course, only time will tell if any of these predictions end up being correct, but the picture will become clearer when outgoing governor Philip Lowe delivers his post-meeting statement next Tuesday.

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