Australia's headline inflation rate slowed from 3.8% to 3.5% in July on a 12-month basis, a slight upside surprise on the 3.4% figure expected. This slowing was driven largely by the early effects of government rebates on household electricity bills, accelerating disinflation in goods prices to a 3-year low (2.8%yr). Underlying inflation showed signs of easing early in Q3, the trimmed mean in at 3.8%yr from 4.1%yr in June and CPI ex-volatile items and travel down to 3.7%yr from 4%yr.
The July CPI report indicated that the disinflationary process in Australia was continuing early in the September quarter, albeit at a slow pace. The upside surprise in headline inflation drove a hawkish reaction that sent the 3-year bond yield up around 8bps to 3.55% and the AUDUSD above $0.68. However, the report should have few (if any) lasting implications from an RBA perspective, with Governor Bullock recently saying that the Board really only bases its policy decisions on the quarterly CPI reports that contain a full update of all prices in the CPI basket compared to the partial updates in the monthly reports.
In July, the main action was in electricity prices as government rebates - at both the federal and state levels - started to come through. Electricity price inflation swung from 7.5%yr in June to -5.1%yr in July. The ABS reported that the monthly movement in electricity prices was a 6.4% fall but would have been a 0.9% rise without the rebates. The full effect of the rebates could take several months to come through due to timing differences in how the rebates are applied across the different schemes.
The fall in electricity prices drove goods inflation down from 3.4%yr to 2.8%yr, a 3-year low. Fuel prices fell in July (-2.6%m/m) also contributing to goods disinflation. Inflation in new home building costs remains elevated but eased from a 5.4%yr pace to 5%yr. Pushing in the other direction, grocery price inflation lifted from 3.3%yr to 3.8%yr driven by higher prices for fruit and vegetables.
Services inflation lifted from 4.3%yr to 4.4%yr, though little should be read into that given that the July report contained only a few price updates from this component of the CPI basket. Most notably, travel costs fell in July (-2.4%m/m) as demand cooled post the peak holiday season in Europe; however, the 12-month inflation rate for travel lifted from -0.7% to 0.2%.