Will this impact the central bank's next rate decision?
Government energy rebates were a key factor in driving inflation down into the Reserve Bank’s (RBA) target range of 2-3%, according to a bank economist.
Australia’s annual headline inflation dropped to 2.7% year-on-year in August, down from 3.5% in July, marking the first time inflation has fallen within the central bank’s target range since October 2021.
According to ANZ economist Catherine Birch (pictured above), without the energy rebates, electricity prices would have increased by around 1%. Over the past two months, electricity prices have fallen 20.1%.
The Australian Bureau of Statistics (ABS) also indicated that further downward pressure on inflation may come as some households have not yet received the first instalment of the $300 Commonwealth rebate.
However, Birch pointed out that the disinflation in August was broader than just energy prices. Annual trimmed mean inflation — a measure that excludes volatile price movements — dropped to 3.4%, the lowest level since February 2022.
While this figure does not directly align with the trimmed mean inflation in the quarterly CPI, Birch called the decline a positive sign. The RBA board had noted that underlying inflation, which trimmed mean inflation captures, is a more significant indicator of inflation momentum for policy purposes.
“That said, with ex-electricity inflation a little higher than we expected and services inflation still sticky at 4.2% year-on-year, we doubt the latest figure will materially impact the RBA’s thinking.”
RBA governor Michele Bullock stated that the central bank expects the slow progress on disinflation to continue into the third quarter. Birch expects the Q3 CPI – due to be released on October 31 – to be a crucial factor in the RBA board’s next meeting on November 4 to 5.
“We continue to expect the RBA to hold the cash rate at 4.35% until the first 25-basis-point cut in February next year,” she said.
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