Electricity rebates saw Australia's headline inflation rate spike from 1.9% to 2.8%yr on the monthly CPI gauge in July, well above the 2.3% outcome expected. The extension of the federal government's rebate scheme on power bills did not come into effect in all states and territories in July, and with annual reviews also occurring, electricity prices surged 13% in the month. That increase will partially reverse in August. Because of this - and with the RBA having essentially dismissed the monthly CPI indicator as a reliable guide on quarterly inflation - markets continue to price in a further 1-2 rate cuts by year-end.
The monthly CPI indicator clocked headline inflation at 2.8% for the 12 months ending July, its fastest pace since July last year and up sharply from 1.9% in June. Given the details within the report, very little weight should be placed on this rise. That said, the measures of underlying inflation also moved higher: trimmed mean 2.1% to 2.7%yr and CPI less volatile items (food and energy etc) and holiday travel 2.5% to 3.1%yr, but that could easily reverse next month such is the volatility of the series.
The key driver of higher inflation in July was electricity prices. The federal government has extended its rebate scheme ($150 paid in two quarterly installments) for the 6 months through December 2025. However, the extension does not commence in New South Wales and the Australian Capital Territory until August. Factoring this in, together with earlier rebate schemes having been used up by households in other states, and after annual price resets, electricity prices were measured to have accelerated by 13% in the month of July. That swung the annual pace from -6.3% to 13.1%.
Housing inflation rose from 1.6% to 3.6% at an annual rate on the back of higher electricity prices, though it is key to recognise that rent inflation slowed from 4.2% to 3.9%yr, its lowest since late 2022. Meanwhile, new home building costs were unchanged at 0.4%yr.
Another category that saw a notable rise was recreation and culture, up from -3.7% to 3.3%yr. This was a seasonally driven rise coinciding with the July school holidays. Domestic holiday travel prices lifted by 4.7% in the latest month.
Taking a wider view of inflation in July, goods prices elevated from 1.1% to 2.3%yr, a 12-month high. That, though, mostly reflects the impact of the rise in electricity prices. Services inflation lifted to 3.5% after dipping to 2.7% in June. The July update however includes only a limited range of service price updates, so little can be drawn from this.
