Headline inflation in Australia slowed to a 3-year low in August as government rebates lowered household electricity bills. CPI on the monthly indicator fell from 3.5%yr in July to 2.7%yr in August, in line with expectations. The RBA made it clear at yesterday's meeting (see here) that it would not be moving to cut on these numbers, highlighting its focus on underlying inflation. There was at least some encouraging news here, with the underlying inflation gauges moving closer to the top of the RBA's 2-3% target band.
Markets had been anticipating a sharp fall in headline inflation in August and today's report did not disappoint. Prices fell 0.2% in the latest month, creating a base effect that saw 12-month inflation decline from 3.5% to 2.7% - a low back to August 2021. The main factor behind prices falling in August was Commonwealth and state government rebates driving a 14.6% decline in electricity prices. This was after a 6.4% fall in July during the early stages of the rebates. The ABS reported that without the rebates, electricity prices would have risen by 0.9% in July and 0.1% in August.
Petrol prices continued to decline in August, another key factor behind the fall in inflation in August. Across the past year, petrol prices nationally are down by 7.6% - a vastly different situation to 12 months ago when prices had risen at a 13.9% pace.
Although volatile items drove headline inflation lower, the underlying CPI measures also softened in August. CPI ex-volatile items and holiday travel slowed from 3.7% to 3.1% at an annual rate, and the trimmed mean eased from 3.8% to 3.4% - both measures at lows since early 2022. While welcomed, progress on lowering underlying inflation has been slow in 2024, a key reason for the RBA holding back from cutting rates as many of its peers offshore are doing.
Key components in Australia's CPI basket that have contributed to sticky inflation are rents (6.8%), new home building costs (5.1%), insurance (6.2%) and health (5.3%). Progress will be needed across these areas to see the RBA moving into its easing cycle.
