Quarterly inflation in Australia was softer than expected in the June quarter at 0.7% on a headline basis and 0.6% in trimmed mean or core terms. The RBA defied expectations to cut rates earlier this month to await today's report. A rate cut in August now shapes as a straightforward decision with headline (2.1%Y/Y) and core inflation (2.7%Y/Y) comfortably inside the 2-3% target band and largely on track with the RBA's forecasts. Market reaction on the report was sharp as pricing for an August cut firmed to a lock, with 2 additional cuts to a year-end cash rate of 3.1% close to fully discounted as well.
Headline CPI came in at 0.7% in the June quarter, a bit below the 0.8% figure expected and down from 0.9% in the March quarter. In annual terms, headline inflation slowed from 2.4% to 2.1% to be pressing the bottom of the target band. The figure was also in line with the RBA's May forecasts and below the 2.2% figure expected by markets. Softer headline inflation was backed up by encouraging signs in core CPI.
The trimmed mean measure was 0.6% in the June quarter, below expectations for 0.7%. This saw the annual pace decline from 2.9% to 2.7% (vs 2.7% expected), its slowest since the December quarter of 2021 - but a tick above the RBA's 2.6% forecast.
Inflation momentum, measured in 6-month annualised terms, has picked up on a headline basis to 3.3%, up sharply from 0.9% at the end of last year. However, that rise has been expected because household rebates on electricity bills have been winding down over the first half of the year. More importantly, core inflation is tracking at 2.6% in 6-month annualised terms, essentially in line with the midpoint of the RBA's target band.
Moving to the specific dynamics in the June quarter, utilities remained a major driver of inflation adding 0.21ppt to quarterly CPI on the electricity rebate unwind. Durable goods (0.25ppt) and new dwelling costs (0.04ppt) - areas of concern highlighted by the RBA - both pushed up on inflation but fairly modestly. Groceries (0.17ppt) also added to inflation, driven largely by a strong rise in fruit and vegetable prices. At the other end of the scale, declines in fuel prices (-0.17ppt) weighed heavily on inflation in the quarter, as did domestic holiday travel (-0.17ppt) during the off-peak season.
Another key aspect of today's report is that services inflation has cooled further. In the June quarter, services inflation slowed from 3.7% to 3.3% year-on-year, its slowest pace in 3 years. This has come on the back of an easing in some of the areas of persistent price pressures, including insurance - now at 3.9%Y/Y from a peak above 16%Y/Y a little over 12 months ago - and rents at 4.5%Y/Y, slowing from highs that pressed 8%Y/Y in early 2024. Goods inflation remained low easing from 1.3% to 1.1%Y/Y.
